If you are complaining all the time about uncertainty in the markets, then you ought to see this. If you are a journalist who uses high frequency trading as an easy target to earn points from uninformed readers then you should also see this. Dealing with the markets has never been easy. Every period had its own level of complexity and sophistication. If you are dealing with the markets the same way it was done in the 1980s or 1990s, then this won’t help you because nothing will help you. You are doomed and you should stop dealing with the markets as soon as possible your addiction allows it.
On the daily S&P 500 index chart above there are two measures of volatility plotted. The middle pane shows a plot of the log of the ratio of daily high to daily low. The bottom pane shows a plot of the log of the ratio of two consecutive closes. Both indicators show the clustering of volatility that occurred in the 1980s, 1990s and in this decade. The two horizontal lines show periods of low volatility in between that were heavens for momentum traders and investors.
So I am asking journalists who always find straw men to attack and investors/traders who always complain to notice from the above chart that dealing with the markets has not been easy for the most part in recent times. After 1980 we had two short period of relatively low uncertainty in between three period of high uncertainty, including the crash of 1987, the technology sector crash in 2000 and the financial crisis crach in 2008.
As a matter of fact, despite the HFT ghosts, the calls for FED manipulation and a host of other complains and sources of uncertainty, like the European debt problems, recent volatility has stayed low in relation to those other uncertainty periods. It is possible that we will get one of those thick horizontal lines next to the latest uncertainty arc shown on the chart above.
In my opinion this is highly possible because when the European problem is resolved one way or another, investors will focus on future economic prospects and recent economic policies will better facilitate growth. Regardless of what will happen, those that think they can continue dealing with the markets in 2012 and beyond the same way they did it in 19980s are up to big surprises and better change their attitude before it is too late. The tools that are required to profit from this market nowadays are very different from the tools used in the 1980s and 1990s because the level of sophistication has increased dramatically. If you do not get the message from me, you will get it sooner than latter from the market.
Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours..
Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)