Volatility Depends on the Market

12/05/2014 12:01 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak points out that the volatility is not the same in all markets so investors need to look at the volatility of each market individually.

For the week ahead, I think what you ought to remember is that there is volatility, and volatility, and volatility. They aren't the same for all markets. For most commentary about the US Stock Market it concentrates on (VIX), the volatility index that measures demand for futures on the S&P 500. It is a stock volatility measure. It is known as the fear index. It is very popular. One of the things about the VIX is that it has been very, very low, historically low. It indicates, and I think rightfully, that volatility in the stock market, at least as you look at big cap stocks—the ones that belong to the S&P—has been very, very low. There is not a whole lot of risk in this market. It has been moving up fairly steadily. There hasn't been a 10% decline, so we had a huge swing in volatility, about a 45% increase in volatility back when we had this momentary…it might have been a 6% drop. We were thinking about maybe we might get 10%. We didn't get a real correction but we had a big swing in volatility but mostly your volatility has been really, really low in the stock market.

That is not what you're getting if you look at volatility in other markets. For example, in the currency market what we're seeing is volatility relatively high and you can see that around you. You've got a near collapse of the bond market in Russia, the fall of the ruble as the Russians have decided that they don't want to try to sell bonds at these prices and risk an actual failure of an auction, so the ruble is down. The yen is down to 119 to the dollar. The euro is testing 124. There is a good likelihood the Brazilian real, one of the least attractive currencies in the world is going to get perhaps weaker, perhaps stronger because it looks like the Banque Centrale Du Brazil is going to raise interest rates to fight inflation. Whether it will help the currency or indicate that it is not good for the currency, I don't know.

The same thing is that you have sort of a feedback loop going on with oil prices so that you're getting credit downgrades of countries like Russia on basis of lower oil prices and a weaker ruble. All these things are adding to incredible volatility in the currency market; so if you look at the US stock market things seem relatively calm. If you look at other markets, commodities or currencies, you can see a lot of turmoil going on in this market. It is possible for a long period of time for these two markets to operate independently, but over the long-term, the volatility from one leaks into the other and I think that is what you're starting to see in some of the moves, in some of the emerging markets, in some of the commodity prices, and that is something to watch as we go forward.

Related Articles on MARKETS