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Why Is There Low Volatility in the US Stock Market?

Posted in Trading

The stock market is in a general lull for the last several months. The S&P 500 index is barely moving, but reaching highs. Normally, one would see movements around plus or minus one percent from the previous close. If there was extreme volatility, one would see two or three percent movement. In some instances, we are seeing a movement of maybe one or two points. That is less than 0.1% movement. There are many reasons for this, and we can only speculate what may have been happening.

Is This The New Stock Market?

  1. One school of thought is that the growth of the overall S&P 500 is influenced by the popularity of the index funds. Jack Bogle invented the first index mutual fund. In contrast to the actively managed funds, one can consider long term investment with low fees and tracking to the S&P 500 index as the benchmark. As actively managed funds underperform, more investors will settle on returns similar to the S&P 500. As more money is invested in the these index funds, these funds will have to purchase stock that mimics the S&P 500 index portfolio.
  2. Others think central banks’ intervenes in the stock market. Several central banks, including the US Fed, Bank of Japan, and the Swiss National Bank have been known to include stocks on their balance sheets. Usually, these central banks purchase government debt in order to issue currency for the country. However, open market operations have been allowed securities to be carried on their balance sheet, allowing the stock market to be “propped” up. Many people will believe the health of the country is relative to price of the stock market. So, central banks can purchase futures or futures options to maintain stability in the price if it starts to dip. If one had unlimited supply of money, one can argue that they can buy keep on buying as others sell, showing a larger demand for stocks if more sellers come into play to keep the overall market stable.
  3. Some may believe that algorithmic trading and high frequency trading have reduced volatility. However, it is highly suspicious when slight news cause dramatic stock declines or gap ups. Also, there have been several instances with one-day runaway market declines, attributing to “fat finger” mistakes.
  4. I guess one can believe that the stock market is awesome and will always go up, albeit very slowly. There will always be some who believe what the market gurus tell them. Financial news anchors and writers offer few reasons for the slow moving market. The focus is usually on the more exciting news, like Amazon buying Whole Foods.

How Shall We Approach the Market?

How do we approach the stock market now in the USA? Here are some stories that may give some approaches to the stock market.

  • Passive Paul likes to just put money into a fund and watch it grow. He has no interest in the stock market movements, but he wants to make money and retire when older. Although, he doesn’t like to lose his nest egg, he believes that the market will always go up and he will retire comfortably. So, he invests all into an index fund.
  • Cautious Cathy is protective about the money she earned. She wants to make sure that she saves enough for investments, but does not like to lose any money. She feels the US market is overheating, and is looking to diversify her investments. She decided to look at some undervalued ETFs that invests in international countries. With a rebalancing strategy, she moved some money from US investments to reduce some exposure.
  • Trending Tom is a technical trader. He is willing to take some risk, but is disciplined in following his trading rules. He has practiced by paper trading for months, and he even did some backtesting to make sure he has an edge. He makes sure each trade has the right position size and preset stop loss rules. Looking at the US stock market, the price continues to show that the “trend is your friend.” He had invested earlier at his entry signals. There has been some drastic dips in technology stocks recently, so as a rule, he placed tighter stops on those tech stocks he invested. If the market weakens further, he patiently waits for an entry signal on the short side.

This article covers trading financial securities, such as stocks. The world of trading often comes with rises and declines of securities, and most things do not rise or fall in a straight line. By the time this article is published, circumstances involving what we mention may have changed. Often, changes in securities can be to the detriment to the traders – seldom is it beneficial. A person should only trade with money that they’re willing to lose because losses are guaranteed. By reading this post, you agree that you’ve read our disclosure. This article reflects the opinions of the author and is for entertainment purposes only. It is not intended to be investment advice and FinTekNeeks are not registered investment advisers. Please consult a professional financial adviser when investing.

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