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MARKET VOLATILITY FALLING FAST

January 11, 2010

 

 

MARKET VOLATILITY FALLING FAST

 

Bernie Schaeffer of Schaeffer’s Investment Research in a December 28, 2009 report wrote market volatility had become comatose intraday as volatility measured by the VIX has steadily declined.   

He wrote: “But, in market environment dominated by ‘quants’ and ‘algos’ and ‘high frequency trading’ strategies—estimated by many to account for two-thirds of trading volume on any given day—intraday volatility has all but disappeared.”  He continued: “What are the implications of this major truncation of intraday volatility.  It is probably contributing to the overall pattern of declining day-to-day volatility, as price momentum from overnight moves is rarely sustained for the remainder of the session.  And, as in all situations when volatility is under tight constraint, the ‘coiled spring’ effect becomes a heightened possibility, as an external event (almost always negative) triggers direction-based trading such huge volumes that the ‘control structure’ is overwhelmed and various short-term strategies blow up, thus adding fuel to the price spike.  That said, I will note that after the initial spike on the morning of Nov. 27, I was very surprised to see the market revert to "coma behavior" for the rest of the session, despite the shock of the Dubai World... READ MORE!


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