Effects of Low Vol

Terry Flanagan

The steady decline in market volatility over recent weeks has left traders with a clearer picture of the marketplace.

“It makes it a little bit easier to trade,” said Tom Steen, head of the Canadian trading desk at Jones Trading, of the falling market volatility. “It makes it easier to negotiate prices, work orders, and generally people are more giving and have more flexibility. During volatile times they tend to hold things closer to their vest, and tend to work orders smaller.”

As the ongoing debt crisis in Europe continues to weigh down investor confidence, amid a backdrop of a still-struggling U.S. economy, some market participants warns investors that volatile times may still lay ahead. Political uncertainty, high oil prices, slowing growth and low interest rates will continue to weigh down investor confidence and stifle investment returns.

Despite the grim forecast, a recent Bank of American Merrill Lynch report asserts that the potential for growth is there. Global equities this year could rally by 10% from current levels, aided by liquidity, modest earnings growth and cheap valuations.

Market volatility was on a wild ride in 2011, as the Chicago Board Options Exchange Volatility Index indicated. Two and three percent intraday swings became the norm. The surges came in the wake of a slew of macroeconomic events, including the European debt crisis, the U.S. debt downgrade, and the collapse of MF Global. The VIX reached a high of 48 on Aug. 8, as the markets reacted to the lengthy U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. In late October, the VIX had declined to as low as 25 before spiking up to above 36 in early November. As of mid-day Jan. 27, the VIX was trading at about 18.

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