Video: Low Volatility a Contrarian Read Indicative of Growing Risk
• Volatility measures are once again settling down; but the retreat may indicate greater risk, not less
• Extended periods of complacency have led to speculative excess and tactical (rather than value) investing
• When insurance products are used increasingly as trading outlets, it is further evidence of risk exposure
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Volatility measures are a traditional measure of 'risk' in the market. So, it would seem that the recent retreat in the activity measures is signaling calm conditions ahead. However, these indicators are adding to the many red flags we are seeing with other market measures that suggest a bigger shift in sentiment is starting to stir deeper in the speculative ranks. Like the S&P 500 - which has climbed for six years and taken to an extraordinarily consistent channel from the beginning of 2013 - complacency is increasingly more alluring. As the unsettled calm persists, speculators increasingly grow restless and tactical. Rather than maintain insurance where it is best served (at record highs), market participants instead shirk the cost that eats into capital gains. Furthermore, the instrument of safety is increasingly treated as a speculative outlet itself. Like the COT, SSI and many other sentiment reflecting measures; volatility can increasingly take on the values of a contrarian reading. We focus on volatility and the not-so-steady view it is reflecting back on the market in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.