Markets See Rising Volume and Volatility

If you look in last week’s credit-driven market dislocation, one small tidbit has peaked through the wreckage: Investors will be surfing choppier markets, as we have seen big increases in volume and volatility.

This is not likely to wane anytime soon.

An interesting article on this exact subject was in the Saturday Journal. Greg Zuckerman took a surprisingly sanguine approach to this significant change in market demeanor:

"Rising volatility, along with heavy trading volume, isn’t necessarily troubling. There have been similar recent periods when volatility, or sharp moves in the prices of securities, soared to these levels, and each time markets rebounded sharply. And a surge in volume doesn’t indicate which way stocks are headed next.

It feels worse this time around to some, though, because it has been so long since they had to deal with these kinds of jumpy markets."

For all I know, he may be precisely right.

However, whenever a prior  element in markets shifts dramatically, it sets my trading antennae all aquiver. And when that element was a factor in the bull argument — lack of volume meant the market was being driven by the so-called "smart money" — it is doubly noteworthy.

What might be the risks to this increase in volatility and volume?

"Just as important, potential dangers are higher — so many traders have been using heavy leverage, or borrowed money, which can amplify gains — and losses. As July comes to a close, more traders fear that hedge funds will start selling to meet possible margin calls from lenders or redemption requests from their investors.

And it is getting harder for some large investors to get certain trades done in parts of the bond market, because their brokers are wary of buying riskier debt amid worries about fallout from the difficulties of subprime-mortgage borrowers."

Whoops! Not very smart after all.

While low volatility often means complacency, it can also suggest a lack of retail traders. So this element is far from conclusive. 

Great chart, tho:


graphic courtesy of WSJ


Investors Surf Choppier Market
Greg Zuckerman
July 28, 2007; Page B1

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Winston Munn commented on Jul 29

    “WASHINGTON (MarketWatch) — A global financial shock is just one “Bear-like” event away, economist Mark Zandi warned Thursday, giving it a one-in-five chance.”

    From Gulf Times: “The worldwide selloff accelerated this week and concerns spread beyond financial companies and homebuilders. Buyers of bonds began demanding higher risk premiums for all corporate debt.”

    Let’s see, we have subprime contained to a “woldwide selloff” with a 20% chance of a global financial meltdown – I guess this globalization thing works, after all.

  2. Momo Fader commented on Jul 29

    And Winston, appears that the container keeping this all “contained” is now planetary sized. Next size up is interplanetary. Perhaps the Martians will buy up all that bad paper?

  3. Winston Munn commented on Jul 29

    This looks more like chaos theory at work; the entire worldwide repricing of risk can be traced back to a single butterfly in Africa who farted upwind during a Bear Stearns seminar on “CDO opportunities”, causing a local government official to comment, “Something smells rotten about this whole business.”

    The rest is history.

  4. jj commented on Jul 29

    Thursday’s 52-week low list was the largest in 15 years

  5. Harry commented on Jul 29

    Are you a buyer or a seller next week. How about some specific ideas on the market.

  6. Don commented on Jul 29

    Bearish Sentiment has been high for a while now, but people have been nervously hanging on for the ride up. Once the downturn turned multiday, a lot of the skeptics pocketed their gains. Retail investors are still scarred by the debacle, so a huge amount flowed out of stock mutual funds this week. I think the only element of suspense was when this would happen.

  7. Pool Shark commented on Jul 29

    I suppose it is fitting that there haven’t been any references to the “Goldilocks” economy for some time.

    I have asserted for some months that we are actually experiencing the “Wyle E. Coyote” economy…

    Like Wyle E., investors have single-mindedly chased alpha (the Roadrunner) with such abandon, that they paid no heed to risk. Indeed, even after running over the cliff, they still refuse to recognize their situation.

    Just like Wyle E., all remains well until they actually look down at the canyon floor thousands of feet below them, and the enormity of their plight begins to dawn on them.

    Last week, Wyle E. looked down, and that’s when the fall began…

    btw, right now the Yen is up to 118.315, and the Dow futures indicate a 250 point DOWN opening.

    (That sound you hear is the carry trade unwinding…)

  8. Pool Shark commented on Jul 29

    Uh, oh…

    118.055 and climbing…

    Tomorrow’s looking pretty ugly…

Read this next.

Posted Under