Markets Preparing for Increased Volatility
Dow, S&P 500 have their worst week since June. Summer slowdown now coming to an end. Trader focus will likely be placed on central bank commentaries, rather than economic data. Volatility to pickup in coming weeks.
Last week, stock markets around the world saw some of their biggest declines since June as reasons for optimism have grown more scarce into the later parts of the summer. This period is typically signified by big drop-offs on market volatility as traders “sell in May, and go away.” The lack of liquidity usually means tighter trading ranges and declining signals for those implementing breakout strategies. This summer has been something of an exception, as stock valuations have hit all-time highs in several key indices, with little to be seen in the way of corrective moves to the downside.
These trends look to be coming to an end, however, at least in the near-term. What’s more traders will need to start positioning themselves for the increased volatility that will likely come when markets return to full strength and key event risks are seen during the month of September. This essentially means that markets will start to pick up even more in the coming weeks, and we could be in store for some very erratic price moves with diverging policy measures being undertaken at several different central banks around the world.
The Week Ahead
In the week ahead, we have another slow data docket, so most of the market’s attention will be centered on any public comments we see from voting members of the US Federal Reserve. On Thursday, we will have PMI and GDP data out of Germany, but this is unlikely to do much to influence markets. Going forward, the key issue will be whether or not the Fed makes the decision to start cutting back on stimulus programs. At the moment, a majority of the market is expecting a reduction of $10 billion in the Fed’s monthly asset purchase program (currently valued at $85 billion each month). A bigger than expected cut-back would be negative for global stocks, and a positive for the US Dollar and Japanese Yen. If, however, the Fed surprises and makes no changes, the Dollar will drop and stock markets will rally to new highs.
My Trading Ideas:
1. Last week’s progress in the EUR/USD has likely run its course, and given the pair’s proximity to historical resistance, the pair is a sell at current levels. Add to this the diverging policy stances at the ECB, and we have set the stage for massive downside in the EUR/USD. This week, look to buy weekly PUT options in EUR/USD at the week’s open on Monday, which should come in near the 1.3340 area.
2. For stock trades, I will be looking to capitalize on the broad based rally in metals, particularly in Silver which has seen a massive run higher in recent weeks. One of the best ways of playing this rally is through Silver Wheaton (SLW), which has a 1.5% dividend yield, and has recently hit new record in its Silver production. Revenues will be helped by this surge in metals prices and these trends will continues if we see any real weakness in the Dollar after the Fed makes its next stimulus decision. Buy weekly CALL options in SLW on Monday’s open, which should be just under 26.50.
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