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Outlook Heading into 2018 – Broad Rise in Volatility; USD, S&P 500, and More

Outlook Heading into 2018 – Broad Rise in Volatility; USD, S&P 500, and More

Paul Robinson, Strategist

With the end of the year very near and market participants filing out for the holidays, we looked at how market conditions could change in January and perhaps for much longer. The focus was on the US dollar and S&P 500, but other markets are set to move too.

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Highlights:

  • Price action in the USD-spectrum and time are set to collide as 2018 begins
  • Stock market volatility is about as low as it has ever been, a rise would lift the tides across the board
  • January is typically a volatile month, but a higher volatility may persist throughout the year

The final days of 2017 are upon us. It was a year where we saw some bouts of volatility, but generally speaking we saw it decline and in some areas precipitously so (S&P 500). Looking at the several of USD-pairs, the charts have been ‘triangulating’ the past few weeks, and given the arrival of an often-times volatile month (January), the timing may turn out to be ideal for a good trading environment.

The US Dollar Index (DXY) and pairs such as EUR/USD, USD/CHF, and USD/JPY are wedging towards ‘make-or-break’ points, which could set off explosive moves as 2018 commences. USD/CAD isn’t wedging, but its recent trading range is aligning nicely as the calendar flips. Today, we didn’t discuss so much the direction (although the lean is USD-bearish), but rather that a ‘momentum-move’ looks to be in the works. Once we see clearly which way that will be, then we can start looking more closely at specific set-ups. EUR/JPY also has an explosive-looking chart with its multi-month range looking to resolve itself.

USD/JPY (One of a few USD-pairs moving towards a breakout)

USD/JPY daily price chart

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The S&P 500 during the past year experienced a volatility decline of historical proportions. Looking at daily changes over the past 12-months, at 0.3% per day it’s the least volatile the stock market has been since the mid-1960s. This is certainly a macro cycle of volatility we are in, and all-things-macro can take time to develop. But we may be very near a trough in this low-volatility cycle. It doesn’t necessarily mean a stock market top, but the ride will get significantly bumpier if this is the case. It’s also worth mentioning that at 8.09%, one-year historical volatility is lower than that of EUR/USD, which sits with a one-year reading of 8.72%. It’s very unusual to see S&P volatility beneath that of the euro. A broad rise in volatility in equity markets will mean assets in general are also going along for the ride.

S&P 500 w/12-mo Avg. Daily Change

S&P 500 with long-term volatility

Bottom line: There is reason to be optimistic we'll see an uptick in volatility in the short-run as not only seasonality favors it, but the charts are set up for it. There is also reason to suspect a major cycle low which brings an extended period of higher volatility may also turn out be an important development which unfolds in the year ahead.

For the full conversation, please see the video above…

---Written by Paul Robinson, Market Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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