Market Volatility dangerously low
Last week, I had the pleasure of returning to the CME where I had spent my last 15 years trading FX Options. Aside from (mostly enjoying) seeing old colleagues, being on the trading floor has always had the advantage of gathering many opinions in a brief period of time. Whether in FX, bonds or equities, it is clear that 2014 has been bad for business as volatility, the life blood of financial markets, has seen extreme lows implying low volumes. In Chicago Trader lingo, the current market environment is often referred to as “Tumble weeds blowing through the pit”. Check out the VIX, the main volatility indicator for equity risk going back to the mid 90’s and you will see that we are once again forming a low Level bottom Phase at which Point it appears the market has no more interest in movement.
However, I would caution that low levels of volatility invariably end as complacency takes hold and an increasing number of “rear view mirror” market participants chase the past rather than evaluate the present for future guidance. From a trader’s perspective, I would point out that the “night is always darkest before the dawn” meaning that low volatility is always followed by a cycle of high volatility.
At the current Moment there is no specific indicator in sight that may change the slumbering markets but I would recommend that we evaluate our Portfolios closely at this juncture. While the bottoming process in volatility may continue for a year(my expectation), I am very confident that we will observe a much higher and trending higher VIX within the next 18 months. Make sure you are prepared for when that happens so that you can enjoy the roller coaster ride aka the global financial markets.