08.23.2011
By Terry Flanagan

Volatility to Continue

As long as the different macro-economic events continue to put a damper on investor confidence, the volatility in the markets will carry on.

“Volatility is something funny,” said Joe Saluzzi, co-head of the trading desk at Themis Trading. “It spikes up and down. I think it will settle down for a while, but it will keep popping its head up again.”

In addition, Saluzzi believes that as long as the global macro-economic issues, including the European sovereign debt crisis and the ongoing Middle East unrest, are unsettled, the markets will remain fragile and vulnerable to sharp spikes in volatility.

“The time frame between cycles will shorten, so rather 6 months between volatility, it may 3 months,” Saluzzi said. “The solution for the global economic problems are not there yet. We’ll see shorten cycles as opposed to when we saw a couple of years of a nice run with no volatility at all.”

The most recent surge in volatility came as investors reacted to news of slowing economic growth, weak consumer confidence and increasing unemployment.

The Chicago Board Options Exchange’s Market Volatility Index, or VIX, has been on a wild ride in recent weeks, rising from about 18 in late-July to as high as 48 on Aug. 8, as the markets reacted to the debt ceiling situation and the Standard & Poor’s downgrade of U.S. debt. It then trended slowly downward over the following days to about 32 on Aug. 17, before once again spiking upward as investors braced for a possible double-dip recession. The VIX, also known as Wall Street’s “fear gauge,” measures the implied volatility of the S&P 500 index.

“The cycles will condense,” said Saluzzi. “Maybe the VIX will go to 25, but it will shoot back quicker.”

As far as the outlook going forward, the picture remains very uncertain.

“We’ll see continued choppiness,” said Saluzzi. “You’ll get your rallies, and pops here and there, but unless there’s some serious improvement in things like unemployment, housing, the European debt situation, then you will continue to see this type of choppiness. I won’t be surprised if we’re lower one year from now.”

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