7/5/2014: Where has all the action gone? FT Weekend article on vanishing volatility

I’ve been talking to a few traders recently about the lack of trading opportunities and general malaise at present. March and April were particularly quiet.  I think that lots of people took two weeks off for Easter during April. Allied with Ukrainian nervousness meant that it was a generally dull month. However if you look at the charts you can see that this range bound period has been extending for a few months. Certainly within the Indices despite hitting some all time highs we’ve been range bound for the last few months.

Reading the FT Weekend on Saturday I noticed that they wrote about the same phenomenon. And they had the figures to back up my technical analysis. The FT’s article by James Mackintosh described how Oil has traded between $100 & $110 for the past year. Since February the S&P500 has been in its narrowest range since Feb 2007. The FTSE100 has been limited to a channel between 6300 and 6900. And the Dollar has been generally range-bound against other developed countries currencies.  They describe how ‘volatility in currency markets has been lower only twice in the past two decades, in 2007 and 1996.’

“Tight trading ranges have set in as volatility has all but vanished” is how they described it.

What does this all mean to new or inexperienced traders?  Those traders who have only known the last 12-18 months of strong Indices surges and major Yen sell-offs?  Well all markets go through phases and this is just another one of those phases.  There are always opportunities in all market phases – you just need to recognise the phase and be agile and adaptable to whatever the market offers you.

The conventional wisdom is that ‘low volatility is a ‘be cautious’ signal’. Maybe that’s what we have here?  For the last few years we’ve over indulged on a glut of free easy money. As markets have picked up and governments look for reasons and excuses to step back perhaps we’re seeing that dawning realisation in mature markets?  Ultimately who really knows?  What we do know from past price action is that the longer markets stay in a range the stronger the breakout trend generally becomes. Will that be to the upside or the downside?  My own natural bias is bearish so I’ll be ready to short at the first sign of a good break-down.  However if it breaks north then I go long. Simple as that.  Until that time I sit on my hands and wait for the right conditions to be present.

Be cautious and trade well!

Paul