Authored by Richard Breslow via Bloomberg.com,
There are a lot of good explanations for why market volatility has risen. I’ve always been a market structure advocate, but it is hard to argue with those citing changing rate regimes, geopolitics, algorithms and the rapid cycling of the newsflow.
Whatever your preferred reasons, most traders accept the notion that it is here to stay. And for reasons I don’t quite understand, are continuing to have a really hard time adjusting to this now common wisdom.
The notion of good versus bad volatility is strictly modern. In the past, the distinction would have been rejected outright. Maybe you would get caught in an utterly unexpected move on a short-term basis, but no one would have complained if it stayed “crazy” over time. Of course, to be fair, back then we still had the benefit of order books which made even the hairiest of situations more definable. And ultimately less scary. Hence my preference for the market structure point of view.
Traders who are active managers have been underperforming their promises to others and their own expectations. And, it has manifested itself by causing them to commit a sin against a lesson taught in Trading 101.
They are repeatedly alternating between feeling obligated to trade purely in the hope of making money rather than waiting to seize a conviction opportunity and throwing up their hands and doing nothing. And doing nothing in the sense of giving up rather than exhibiting the patience and deliberation required of a disciplined approach.
Active investors aren’t playing the market, they are being played by it. Price action is described as risk-on or risk-off on any given day, as if it has significance, when it is really just chasing whatever is the latest price action. And figuring that someone else must know something. Ranges don’t get exploited for the repeated opportunities they present as market sentiment ratchets-up at the extremes. Often with no meaningful fundamental reason. Fading moves seems to be a lost weapon in the trading arsenal.
We’ve all become skeptics in life, but for some reason not in our trading — until its too late. And then there is panic as overextended, low-conviction positions have to be covered. You can’t expect self-inflicted “bad volatility” to take the blame for a faulty process.
Hindsight makes for easy trading, but it is painful to look at the chart of the S&P 500 tracing out a sine wave since early October between 2600 and 2800 and accept the fact that the preponderance of traders seem to have found this an unhappy, even an untradable, episode.
And the reason this sorry state of affairs has come about has nothing to do with the list of complaints above, but because no one feels they can afford to believe in anything…Yet, in short blasts, take things at face value.
Every societal and market issue has been infused with cynical compromises, can-kicking and window dressing. It started at the top and has seeped down to all aspects of life.
Most definitely to the detriment of investors as well as the population at large. It’s hard to trade when you feel things are out of control.
This problem is much bigger than just adjusting one’s trading practices. It’s a major reason contributing to the rise of populist movements, fueled by a misguided application of “Anything but.”
And in a new twist, this week, we have had two political leaders make the case for getting what they wanted by promising to leave.
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