Market Analysis

Volatility, She’s Back

Volatility is back and she’s here to stay and investors better get used to it. And traders, embrace her, she’s your best friend if you respect her.

In 2018 volatility finally broke free from the artificial bondage placed upon her by arrogant central bankers who thought they could control and manage the global economic and financial system with policies of permanent intervention. Initially introduced to the public as emergency measures following the financial crisis these policies morphed into a global perversion of free markets, artificially compressing volatility, dislocating money flows, price discovery and asset correlations, and ultimately resulting in the renewed market bubble that appears at imminent risk of bursting.

The consequences have run deep. Hedge funds found themselves lagging index performances as using your brain to analyze market structures to identify edges no longer mattered. Investors abandoned these funds in droves and turned to passive index funds under the illusion that ETFs are risk free vehicles to keep making money in perpetuity. After all risk assets never stayed down and every dip was bought. Why? Because there was no alternative (TINA) and if things wobbled there surely was going to be anther intervention just around the corner. QE 1, QE2, Tarp, Twist, QE3, the programs kept on coming. And so what if the Fed stopped and started to slowly crawl rates higher. There was the ECB printing more, the BOJ never stopped buying, rates stayed negative around the globe and yield thirsty money had to go somewhere else. No accident that the SNB kept printing Swiss franks and buying US $FAANG stocks by the billions and billions. Money had to go somewhere.

Fearing a new downturn emerging in 2015 and 2016 global central banks embarked on an intervention spree to the tune of over $5 trillion between 2016 and 2017. the largest concentrated intervention of its kind. Was it any wonder that volatility was locked away with the key thrown away?

The world had become risk free after all and stock markets stopped experiencing any form of 2 way price discovery:

15 positive monthly candles in a row. It was an awful environment for fans of price discovery. Permanent levitation, 2-5 handle ranges for days, weeks on end, low volume, virtually no volatility of any kind. Just buy ETFs. No wonder hedge funds despaired.

Bears kept screaming about artificial volatility compression, nobody listened. One can ascribe all kinds of narratives to this time: It was an illusion, it was manufactured, it was a pervasion of the global market price discovery mechanism.

But no more. Volatility has freed herself:

The perversion that was 2017 is over. And volatility is celebrating her new found freedom.

But don’t think she has gone amok, she’s merely returned to the range of her historic playground. Nothing what we are witnessing now is extreme, it’s part of the historic range. But participants have forgotten. Dulled by years of artificial compression bad habits have developed.

For traders this is the environment we’ve been wishing for to return. Wide price ranges in both directions. Ultimately traders don’t care in which direction markets are moving, they just want them to move. Identify technical setups and edges and execute on them. And with volatility freed these setups are coming frequently now.

So traders don’t fear volatility instead embrace her, if respected she can be your best friend. As to investors in passive ETFs take heed: The time of complacency has ended and perhaps making money in markets may require more discerning decision making than just sticking cash into ETFs. Times are changing. Volatility, she’s back.


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All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.

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