When the Market Volcano Erupts?

Global markets traded almost unchanged on Tuesday morning. US indices have managed to pull through the corrective moods, and futures for the S&P500 index have returned to historical highs. Asian indices traded almost flat.
Alexander Kuptsikevich
fear traders

The volatility of the US stock markets has been declining for the last couple of weeks. This calm seen in the return of the VIX index to this year lows near 12 level. The Greed and Fear Index for US stock markets now stands at 89, level of “extreme greed”, contrasting brightly with the level of 18 just one year ago.

Both indicators show a confident purchase of stocks by investors. However, by a greater extent, this is characteristics of the past, not future. Often in such conditions, investors should ask themselves a question like, what if many have already bought, who will be the next buyer? This makes us very cautious about the nearest prospects of the markets.

Four market corrections followed the decline of VIX to levels below 12 in just over 12 months. Strictly speaking, it is not so much the shallow VIX levels that are important, as the growth of this indicator from these lows. Restoring of market volatility launches the chain of profit-taking and bubbles deflation.

The longer the markets were in a state of serene calm, the more significant can be the correction with a real explosion of volatility. Since the beginning of the year, we have seen three relatively short attempts to defuse excessive tension: in May, July, and September. The September’s 5% correction was the smallest, that may be an indirect sign that the markets did not release all the steam out.

As in the case of the Earth’s interior, the tension may increase, coming to the surface periodically. We have very few observations, and the model itself is too multifaceted to build accurate predictive models. We can only say with certainty that the longer the internal stress stays on the markets and the longer the optimism reigns, the more devastating the subsequent impact may be.

For markets, this means that the current rally has reached a precarious cornerstone in recent weeks and months. Declining volatility and extreme levels of “greed” are also evidence of the final stage of the rally. The duration of this growth is now mostly dependent on the creativity of central bank policies. The central banks still have the opportunity to extend the rally of the markets for months ahead. However, they are risking to get an even less manageable drop in the future, capable of “correcting” all the growth of the last decade.

Potentially, a correction to market growth over the past ten years could send the S&P 500 index to the 2200 area, which is 30% below current levels. The dollar may have a similar amplitude, which can jump by 25% to the basket of major currencies, and the euro/yen pair risks to collapse by 30% against the background of global deleveraging. However, one cannot exclude the smaller, 5%-10% declines in the coming weeks. In this case, it will be possible to say that the internal tension of the markets may increase further. It is impossible to predict when and in what direction the future spike of anxiety in the financial volcano will take place. So far we can only see signs of its imminent eruption.

This article was written by FxPro

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US