The US stock market is once again hovering below all-time highs, with low volume but significant volatility. The low volume is making investors cautious about jumping in. This, of course, leads to more low volume.
By Vikram Rangala
Friday, May 6, 2016
Headlines this week seem to center around the theme of uncertainty about the global economy. Today’s somewhat lower Nonfarm Payroll number is adding to that talk, though it’s worth pointing out that this is yet another month in the longest unbroken job creation streak in US history.
That is not bad news. Being only less good than March’s very good number is still pretty good. Nevertheless, several news sources and analysts are quoting and discussing UBS Group AG Chief Executive Officer Sergio Ermotti statement that the markets are experiencing a “paralyzing volatility.”
Paralyzing volatility? Volatility means movement and movement is what most traders seek to exploit. Yes it means risk, but risk is our business.
What Ermotti meant was that some investors, both at UBS and elsewhere, aren’t sure which way all this volatility is going to take the markets next and this uncertainty is making them reluctant to enter the markets. In other words, they feel paralyzed looking at the volatility.
When investors are afraid to dip their toes in the water, volume goes down. And when volume goes down, volatility goes up.
Why? Imagine a giant supertanker on the ocean and a small fishing boat next to it. If a current comes along, the small boat will get pushed more easily than the larger ship. When you have low volume, meaning fewer traders in the water, it’s easier to push prices around and that’s what has been happening.
Zoom out to a daily chart and look back over the past year, however, and you’ll see that all this volatility has happened within the same range, between 2000 and 2100 in the S&P 500 index. It was in that range for four months before taking a dip in August, then it was in the same range for two months before the dip in January.
Now it’s in that range again and some are wondering if it will dip again, or move higher.
No one knows for sure, but for it to move higher, someone has to start buying in bulk. That’s what makes this other piece of news intriguing. By some estimates, over $200 billion in cash is sitting in the coffers of some major private equity and hedge funds, waiting to be spent. They can’t hold it indefinitely; they have to put it somewhere.
It may be that they will eventually put it in US stocks, especially since, despite all the global worries, the US economy is still creating jobs like that’s all it knows to do. But like all smart shoppers, those funds will look for bargains, which means they may wait until prices dip once more to stock up before letting prices rally to new highs.
We can’t be sure if the next big move in US stocks will be that rally, or a dip first. It might even be that bear market some curmudgeons are still predicting. But we can be sure of one thing: volatility means opportunity. Someone eventually is going to step in and volume will come back. Especially when a few people are sitting on $200 billion that isn’t doing anything.
Photo: "Dipping a toe in," CC by Kelsey O'Brien on Flickr
This information has been prepared by Nadex, a trading name of North American Derivatives Exchange, Inc., prepared by independent third parties contracted by Nadex or reproduced form third party news agencies. In addition to the disclaimer below, the material on this page does not contain an offer of, or solicitation for, a transaction in any financial instrument. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.