Since July volatility is a word we have used frequently and today the volatility continues.  We have had numerous violent moves in the market weekly in both directions.  The whole time we have been trading in a range since the initial fall from the Washington debt ceiling debacle.  Now volatility continues into October.  Still I said I had purchased the VXX and it was up a healthy 6.50% on an ugly trading day.  The VIX was only up 9%, so the VXX protection might even have more value!

Volatility in Markets

I do not think this volatility is going to stop anytime soon.  I mentioned the last two days that I thought the rally felt funny.  The lack of follow up news on the “buying the rumor” of a European TARP announcement has brought uncertainty back.  This market has shown over and over how much it hates uncertainty.  Uncertainty was said just about every day during the 2008-2009 crash.  Uncertainty was used during the August US debt ceiling drama between Republicans and Democrats positioning for the 2012 election.  Uncertainty in Europe is what is sitting over us right now like fog in the global markets.  With this uncertainty comes volatility.  Volatility has been here for literally months!  The last time the VIX was below 30 was August 3rd.  Since the VIX index measures the volatility in the S&P 500, this demonstrates that there have been more daily moves of over 1% than not.  Remember the first week after the fall?  We have a record streak of at least 500 point moves on the DOW.  That was history!

Volatility in Commodities

Even more concerning than the volatility in equity markets is the volatility in commodities.  Gold and Silver which up until recently have always traded as a safe haven or a great hedge.  These last couple weeks, that has seemed to decupple.  The GLD had quite a few moves (in both directions) of over 5%, that is not very common.  Silver’s volatility was even more violent.  The SLV has moved numerous times in either direction by 8%.  The volatility in the leveraged ETFs in these metals have made then extremely risky.  The ZSL and AGQ have moved in either direction over 20% quite a few times in last couple weeks. 

The commodity that scares me the most is copper.  Copper has been extremely volatile, but the direction has been more one sided.  Down!  Copper has been in a free fall and this normally is not a good sign.  Many investors say the volatility and the decline of copper are suggesting there is a bigger slowdown than some say.  China must be slowing.  Europe is going to be a disaster.  Nothing shows the direction of copper better than Freeport McMorran.  FCX now has over a 3% dividend while dropping nearly in half in last 8 weeks.  I would never have guessed it going that low a few months ago.  Until copper bottoms, I do not think the market will stop being volatile or heading downward. 

The European issues is a double whammy on the red metal.  Not only is Europe reducing the amount of copper it uses, the drop in the Euro is making the US dollar index stronger.  So as the dollar strengthens, commodities in general trade inversely, but especially in copper.  So, no I am not suggesting that I feel doomsday is occuring.  I personally feel the global economy is better off than the markets have traded recently.  What I do know though is the market is trading on uncertainty which leads to volatility.  Once we get resolution in Europe, I feel a bunch of this uncertainty will go away and we can bring our blood pressure as well as volatility back down to normal levels.

Cheers,

Vinny

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2 Responses to Volatility Continues

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