Oh That Volatility

There is an old Chinese curse which says "may he live in interesting times…"     

There is no doubt that we have be so cursed – or blessed, depending upon your perspective.

I find these volatile markets to be exciting – not in the sense that I'm making lots of money (I'm not), but in the sense that I go to work every day as a trader, and simply have no idea what to expect.

Others have commented on this volatility:

Felix Salmon, believing this volatility is reasonable under the circumstances,wrote: "Bonds are easy things to value.  Equities, by contrast, are another world entirely. How do you even
begin to value such a thing?..

In most models, a small tweak in growth rate is likely to have an enormous effect on stock price – and no one
can possibly predict future growth rates with enough accuracy to be remotely useful.

Ultimately, there's only one reliable way of valuing a stock, and
that's to look at where it's trading in the market.

So what's happening now is that stocks are fluctuating in a very big
grey zone — what you'd expect, given overall levels of doubt and
uncertainty about the future. And now more than ever, the daily
direction that stocks move doesn't mean anything."

My summary: Stock prices, and the direction and size of a daily move, are essentially random.


James Surowiecki, writing for New Yorker magazine believes the volatility is unreasonable: "the current stock-market volatility, not just in the U.S. but
across the world, is at what I think you have to call nonsensical
levels. Yesterday, of course, we saw yet another massive late-day sell-off, which took the S. & P 500 Index down a full three per cent in about forty-five minutes. That was followed by a seven per cent drop in the Nikkei overnight…

The point is that when literally every day the market swings wildly
from one level to another—so much so that a seven per cent drop in the
Nikkei is barely worth a mention any more—it seems likely that
something other than pure information aggregation is driving it.

I increasingly wonder about whether volatility
feeds on itself… It’s not just that these
massive swings make it harder to keep your eye on the long run. It’s
also that going back to a market in which a typical stock moves half a
per cent or less a day may be hard for traders who have gotten used to
a market in which fortunes can be literally made or lost in the space
of a couple of hours."

My comment: Whenever this ends, will we feel the markets are boring, or be happy that the nerve-wracking moves have ended (for the moment)?


Then there's this quote from David Gaffen of the WSJ's Market Beat blog: "The stock market is not a good indicator of what’s going on out there — there’s just pure fear, nervousness, margin calls and algorithms and electronic programs,” says Joseph Saluzzi, co-head of equity trading at Themis Trading."


Do you have any comments to share concerning volatility, VIX, or the markets in general?


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