The End of the Financial World as We Know It? Naaaaaaaaaa!

The End of the Financial World as We Know It? Naaaaaaaaaa! Send to a friend Print Sunday, October 19, 2008 written by Adam Perl Volatility yet again played a crucial role in last week's trading as the major indices bounced back and forth, closing the week with modest gains. The major movement came on Monday as headlines showed that officials are willing to do whatever it takes to control the recent liquidity crisis. The Federal Reserve said that central banks will offer financial institutions unlimited dollar funds, while European officials mentioned that governments will purchase stakes in distressed financial companies. The news sent a sigh of relief throughout the world, sending numerous indices across the globe to close up by double digit numbers. Unfortunately, positive sentiment didn't hold for long as the rest of the week was characterized by lackluster sessions, affected by continuous negative economic data and headlines showing that many companies fell short of their earnings estimates, due to the economic slowdown. Should we be surprised that volatility is so high? Over the last couple of weeks people's awareness about the financial situation has sharply increased due to the maximum exposure that the press is giving it. "Financial Crisis", "Recession", "Economic catastrophe", those are just a few of the headlines that appear nowadays in all influential newspapers and websites, not just financial ones. Due to the extreme development of the internet, allowing people to seek information and make transactions with the click of a mouse, small investors can now take advantage of the various types of markets, prospering from market trends. Once, tools that were only available to large banks or institutions have now become available for commercial use, allowing people to invest in stocks, bonds and Forex. The ease of selling or buying different securities across the globe has increased trading volume on all financial assets over the years. Last week's volatility caused by easy access to headlines across the globe increased historical volatility on major indices by approximately 50% compared to 10 days ago. In addition, when looking at the VIX (volatility index), that is calculated on the S&P, one can see that the markets are currently trading at historical volatility levels. Should we really be surprised by the current volatility level, when trading volume over the years has increased to such a level that 1930's volume (during a period which is according to some, similar to the current crisis), seems to be only a fraction of the amount traded worldwide today.
VIX- volatility index

*courtesy of stockcharts.com

What seems to be a catastrophe situation can often present the best opportunities Over the last couple of months, the Fed along with other central banks have made coordinated actions to increase the money supply and restore the financial system to a more stable environment. Until now it is estimated that the Fed has pumped into the system over $1.5 trillion Dollar, 5 times more money than the ECB and roughly 10 times more than the BOE.

*Current estimates of government funding including bank nationalization in Dollars Under normal market conditions the additional supply of money would have decreased the value of the Dollar, but due to market circumstances the Dollar has become the preferred currency by investors. Since July the Dollar index has increased by 16% alone. While current levels are signaling a slight correction, a higher Dollar will attract financial investments in the U.S, especially if investors start to see a bottom, while other economies have not found it just yet. England's housing market is continuing to drag down the economy, while jobs are being shredded left right and center. Europe is also trying to cope with numerous economies on the verge of recession, which could lead to further rate cuts by the ECB.

Even though Friday's U.S trading session didn't turn out to be a miraculous one, yields on bills and bonds increased as money exited the bond market while volatility on future option contracts continued to decrease deviating from current levels. In addition, with the major U.S indices trading around 2003 support, market guru Warren Buffet encouraging investors to jump back on the straddle to buy discount level stocks and an increasing Dollar, a shift in sentiment might not be so far off. One thing is for sure - that while the new president of the United States will have a lot to deal with in his first year in office, before we know it stocks will be rallying again, the economies will be back on track and investors will be looking in the rear view mirror at what was once again another economic slump throughout the continuous market cycles. Technical Analysis

*courtesy of bigcharts.com

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About the Author
Adam Perl has over 7 years experience of trading, analysing and forecasting the financial markets . Over the years Adam has dealt in private fund management, funds that specialize in FOREX and equity trading. To date, Adam is the editor of dojit-uti.com, a FREE finance portal allowing trader to receive and publish market insights, while enjoying other services such as free education that the site provides .http://www.dojit-uti.com