Stock Index Volatility Rising: Should We Worry? Crypto Still Falling

by Francesco Placci

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What happened on the markets this week?

Among the most important events,  stock indexes undoubtedly trended downwards, with Nasdaq falling by around 3.7%. The energy sector was also negative, with Natural Gas still in decline, and the same goes for the meats sector. Bitcoin went down, and it seems to be in a volatility compression phase again. On the other hand, the bonds and metals sectors ended the week higher.

If you want to learn more about how the markets moved over the last few days and understand the volatility's current situation, watch our weekly overview now!

Enjoy! 😎 

Transcription

Hey guys! 

One of the coaches of Unger Academy here, and this is the usual weekend chat about the most relevant market trends of the last week.

Okay, so the most striking thing that took place in the financial markets over the last five days is, without a doubt, the downtrend of stock indexes. As you can see, at the moment, they are all at a loss. The Nasdaq, in particular, is losing around 3.70%. The Mini S&P 500 is doing a bit better, losing only 1.80%. And the European stock indexes are also doing a bit better.

However, what's particularly striking about this downtrend is not its extent because this movement is still quite limited, so there's nothing striking about it. What matters here is the increase in volatility that we're seeing in this market phase and that, to be honest, has been going on for a while now. 

In fact, if we look at the trend of historical volatility over the last month, we can see that it's at the hundredth percentile. And if we take a look at the trends of historical volatility over a longer period of time, for example about a year, we can see that even in this case, volatility levels are very close to the hundredth percentile.

If we look at the standard deviation chart, we can see that at the moment, we are on the highs. This is the chart of the Nasdaq, but this trend can be observed on all stock indexes.

Finally, a glance is enough to understand that we're in a slightly different phase from the previous ones. You see how the ranges have expanded over the last month? That's even more evident on the Nasdaq. We came from a phase of relative calm, in which the market was rising, and now we can see that the daily fluctuation of the prices of stock indexes are widening.

But let's also take a look at the term structure of implied volatility. As you can see, on a one-month period, so from the beginning of November until today, more or less, we can see that volatility tends to rise on all maturities, and this is even more evident in the case of long-term maturities, although at the moment, well, we aren't in an "anomalous" phase, let's say. In fact, we're not in backwardation yet. We're still in contango, which means that short-term volatility is lower than long-term volatility. So for now, there are no signs of real danger on the markets, although this is certainly a situation that requires some attention.

What else can we say? Of course, we can talk about the rebound of the bonds. We all know that bonds and stocks are inversely correlated, so it's quite normal that when stocks fall, bonds bounce back. This is obviously good for all our asset allocation models because these uptrends help balance the portfolio's performance.

Then we have the energy sector, which is completely negative this week, with Natural Gas falling by more than 5%.

Metals, on the other hand, show overall positive returns, even if there's nothing special here.

The meat sector was negative.

And as for soft commodities, we certainly need to mention the good performance of Orange Juice over the last 5 days. However, nothing else has happened in this market that deserves attention.

On cereals, we can see that Soybean Meal has been rising this week.

And as for currencies, the Euro-Dollar is still around the same value as the last few weeks and is 1.1327.

Finally, Bitcoin went down again this week. At the moment, we're in a compression area again, and it almost looks like this area is going to be broken through very soon. So let's wait and see what will happen. As you know, there's an alternation between high and low volatility phases in the markets. A couple of weeks ago, we were in a volatility compression area at this level, and I believe that we are more or less in the same situation now. So let's wait and see what Bitcoin will be doing by the end of the year.

Alright, let's conclude our video with an overview of the upcoming rollovers. As you know, Friday was the three witches' day, which means that we had a lot of rollovers to do over the last few days. 

Next week will be a bit calmer, however. On December 23rd, just before the Christmas holidays, we'll have to roll over the Natural Gas, the Orange Juice, and the Feeder Cattle.

And with that, our weekly overview of the markets is over! 

But before we say goodbye, I'd like to give you a suggestion. If you're interested in systematic trading, we have a video that you really cannot miss. You can find the link in the description of this video. It's a webinar in which Andrea Unger, the only 4-time world trading champion with real money, explains how his trading method works, which is the exact method that's allowed him to get the extraordinary results we all know.

Until next week, have a great weekend! Bye-bye!

 

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Francesco Placci

Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.

My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.

After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.

Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.