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Nothing stuns Wall Street: volatility drops to record lows

Trump’s continued scandals as President of USA, the Federal Reserve split between falcons and pigeons, the dollar in a two-year low zone or an oil that fails to rebound despite OPEC’s efforts. None of this seems to scare Wall Street, where volatility, also called the index of fear, fell yesterday to 9.2 points, the lowest since there are data -1990.

At the same time, seeing the main US indexes in the area of ??historical highs is not a coincidence and is precisely one of the main causes of volatility in record lows. As market analysts explains in a report that will be published soon on his website, “these levels are historically striking, just as they were when in other periods this index was between 30 and 40 points, taking into account that the historical average is approximately 20 points. ”

The ‘snowball’ effect

According to the analysts, this circumstance “hides a possible increase in risk.” The excess liquidity that exists in the US market is increasing the indexed investments [passive management products], some of them very leveraged. Increases the yields, which gives a false sense of stability, however, when the corrections arrive, the falls of these investment vehicles are even more pronounced than those of the market itself, “argues Santacruz.

In this same line, the analysts point out that “the excess of indexed products has the danger of seeing a snowball effect, by which when there is a fall, will be deepened precisely by these passive funds.”

Likewise, the volatility of a bull market is often “erroneously” related, as it happens now, “since this indicator what it measures are the exaggerated movements of the market, both upward and downward” , says the analyst, who adds: “However, the falls are often much more violent movements than the rises”, which is why stock market crashes often coincide with the volatility rallies – see chart.

In this context, “it is advisable for the investor to have liquidity”, since, as the expert suggests, “when there is a rebound in volatility, it will be an excellent opportunity to enter the market.” Proof of this are the most recent examples found in the historical series. The last time the index surpassed its average was in November of last year, when Trump won the elections and, since then, Wall Street accumulates almost 16 points of profitability while who takes positions taking advantage of the Brexit, already gains more of a 21% If it replicates the Standard & Poor’s index

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