The US market exhibited volatility this week following what has been a largely calm year.
Friday, October 10, 2014
In the past three days, the Dow fell 273 points, gained 275 points and dropped 335 points. Stocks fluctuated at the highest rate in three years.
Investors first showed caution over sluggish global economic growth on Tuesday, followed by relief on Wednesday on the news the Fed will wait to raise interest rates. Thursday saw renewed fears over the European economy and the stock market turned in its poorest performance of 2014.
For a reference point, consider the S&P 500, which gained or lost at least 1% in six of the last 11 trading days – whereas earlier in the year the index lasted 60 straight days without a single daily move of 1% or more.
“We’ll say this again unequivocally: the tone contained in client conversations has shifted meaningfully,” Dan Greenhaus, chief strategist at New York brokerage BTIG, said in a letter to clients. “What was once an assumed march higher for stock prices is now a (nearly) assumed march lower. Sentiment has done a 180.”
European index faces a big slide
Europe’s primary stock index, the Stoxx 600, dropped 1.5% and set pace for a 4% decline on the week, according to Market Watch. Should that forecast hold, it would be the biggest weekly fall since May 2012. At the heart of the decline is a weak German economy, which is Europe’s largest.
German exports for August declined the most in over five years, industrial output suffered a sudden drop and business confidence reached a 17-month low.
With that said, some experts are not yet hitting the panic button. Christian Schulz, senior economist at Berenberg, told Market Watch that while the German economy is performing poorly it is not due to structural weakness or internal problems. Rather, external influences and uncertainties are affecting investors’ poise.
“As soon as that uncertainty fades, Germany will recover very quickly. And with that, the rest of the euro zone’s growth rates will also recover fairly quickly,” Schulz told Market Watch. “German confidence was also the first in Europe to start declining and the crisis countries, the really vulnerable ones like Spain, Greece and Portugal, they held on very well into August. So that’s certainly not where the crisis originated. It originated in Germany.”
How to protect your assets in a volatile market
In traditional trading, market spikes – large upward or downward movements in a short period of time – can force investors’ positions to close. They might have insufficient margin to keep the position open, or they might have placed a stop order to reduce risk. But stop orders don’t allow reentry, so if the market recovers the original position is lost.
Nadex offers binary contracts that have built-in floor and ceiling levels, which provide the same protection as a stop order without the risk of being stopped out. Investors can never lose more than their initial collateral and risk is always capped.
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