3 Reasons Why Market Volatility Could Kick Your Ass

Traders, over the last few days amid the extreme market volatility my comments have remained largely observational and passive. To some clients that might come across as not fully taking advantage of the market volatility on offer.

It is a fair point, but as previously noted, this type of volatility caters better to day traders not traders looking to take positions that might last for 2+days which is what our average trade duration is.

With nearly 20-years as a trader, I have developed a perspective that allows me to see what the market really is offering up and not being seduced by simply the size of the moves.  Allow this post to offer a further discussion to what is taking place currently in the markets.  It might be a bit 'wonky' and technical, but it will shed valuable light as to why it is a bit risky to be playing the market at present.

• VaR Value at Risk is rising faster than market participants can reduce their gross exposure. This creates a nasty game of chasing ones tail and forced selling.  We likely saw some of that on Wednesday at the open.  If it persists seemingly large random moves will become commonplace. 
• Correlations clients likely know how heavily I rely upon correlations in the major asset classes to FX.  Not understanding the impact of correlations makes it impossible to make consistent trades.  While correlations are always in flux, I cannot recall a recent period where they are so tough to gauge - kinda like chasing Jell-O around your dinner plate with a fork.  
• The Fed regardless of your opinion of The Fed (I think they are utter boobs and have done vast damage) it is tough to deny that the stock market and the economy constantly look to The Fed to rescue them from bad situations.  Thus I was starting to wonder at what level in the S&P's would need to be seen for The Fed to float a trial balloon for QE 4?  Surprisingly, not too low, mid-1800's when Fed Governor Bullard said tapering might need to be restrained or more QE.  Frankly I think that people are beginning to realize what a mess they have created and that they are trapped.  If that line of thinking becomes more prevalent, it could get pretty ugly out there.

With that said, I am treading carefully in here for good reason.  Do not get sidetracked by what others might be saying or that virtually every trader on Twitter is killing it.  Really?  Given that virtually no other traders/firms have a public link to a live trading account tells you all you need to know.

There will be trades, that much is true, I suspect it won't be too much longer.