Forecast Calls for Volatility

From the Wall Street Journal:  Investors Bracing for More Sharp Swings in Stocks, Commodities and Currencies

Investors are bracing for a stormy summer, as steady asset-price gains fueled by bottomless central-bank liquidity have given way to sharp swings jolting stocks, currencies and commodities alike.

One of the side-effects of massive government intervention in markets via monetary policy is that changes in policies have a dramatic effect on global markets.  After all, governments are usually bigger than any one individual private investor and policy changes are closely watched for clues regarding interest rates and other monetary effects.

Since Federal Reserve meeting minutes released May 22 indicated the central bank would consider as soon as this month cutting back on bond purchases, the Dow Jones Industrial Average has swung more than 200 points in a day six times. There were only four such moves during the first 20 weeks of the year.

To be sure, 200 points isn’t what it used to be. Four years ago, 200 points was 2.3% of the Dow. As of Friday’s close, it is 1.3% of the average’s value.

The moves in the U.S. have been dwarfed by those in Japan. The Nikkei Stock Average had rallied 76% from Nov. 13 through its peak on May 22 as the country’s government and Bank of Japan undertook new efforts to revive Japan’s economy. Since then, the Nikkei has tumbled 18% and traders have regularly been rocked by large intraday price swings.

Stocks aren’t alone in their bumpy trading. Gold, once an investor favorite amid questions about the long-term impact of easy central-bank policy, dropped seven consecutive days last month in its biggest losing streak in four years. The yen, after slumping 26.5% against the dollar between November and May, last week rose 3%.

Investors who try to anticipate these changes are often caught off-base and even large institutional traders can lose millions if not billions in a very short span of time.

How to play the game?  The answer is to create a portfolio that can weather the storm and that does not require you to out-guess the market movers.  That requires knowledge of the options, the skill to create a storm-proof portfolio, and the discipline to execute the plan.  Good luck.

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