Volatility loop: Has global uncertainty pushed the market into a bear trap?
This week, markets fluctuated in a range, generally uncertain. Before this week, domestic stock markets had been able to recover from recent losses quickly. The more significant concern is whether this surge can be sustained.
Markets have discounted the impact of the Covid pandemic, have adjusted to rate hikes expected by the US Fed, and have discounted the likelihood of a global war. Also, the Governor of the RBI has allayed some fears by promising that Indian inflation is just temporary.
As a result, although the prospects of this recovery being a bear trap are slim, markets are likely to be volatile and consolidate within a range in the short term, at least as long as a few gloomy clouds continue to loom overhead. The whole economic impact of the Russia-Ukraine conflict will only be known over time, and it will be studied in the meanwhile.
Price spikes across the board products were the talk of the town as the war between Russia and Ukraine culminated in another battle between inflation and the end consumer. To address margin problems, India Inc has attempted to pass on higher raw material prices to consumers.
This week, the price of petrol, diesel was raised. Furthermore, automakers, fast-moving consumer goods firms, steel industries, and paper companies have all raised their prices. These increases will be fully reflected in the April inflation report.
What Is a Bear Market trap?
A Bear trap is a pattern that occurs when a stock’s or other financial instrument’s price action wrongly implies a reversal from a negative to an upward trend. Institutional traders strive to set up bear traps to entice regular investors to take long positions.
If the corporate trader succeeds and the price rises briefly, it allows institutional traders to dump more significant stakes of stock that would otherwise cause prices to fall dramatically.
If the corporate trader succeeds and the price rises briefly, it allows institutional traders to dump greater stakes of stock that would otherwise cause prices to fall dramatically.
When stocks are purchased, however, they immediately become a selling pressure on that stock. As a result, if too many individuals buy the stock, the purchasing pressure will decrease, and the potential selling pressure will increase.
Institutions may decrease prices to promote demand and raise stock prices. As a result, inexperienced investors sell their investments. When a stock’s price falls, investors rush back into the market and the stock’s price rises in response to the increased demand.
A financial market investor or trader feels that the price of a security is about to fall. Bears may also assume that a financial market’s general trend is deteriorating. A bearish investment strategy seeks to profit from an asset’s price drop, and a short position is frequently used to carry out this approach.
What causes market volatility?
Volatility is defined as unpredictability, and this description holds in the investment industry. It is a measure of the variance between possible returns for a given market index in technical terms. To put it another way, market volatility is a measurement of how much a market changes in value over time. When a market is considered very volatile, it is frequently unpredictably turbulent and has big price swings.
Economic issues frequently drive market volatility; interest rate fluctuations and fiscal policy are just a few examples of themes that appear to have a constant impact on market volatility. Political developments have played a major impact in recent years. Because market volatility is a mirror of investor attitude, every factor that can influence investor behaviour will have an effect.
The CBOE VIX, or Chicago Board Options Exchange Volatility Gauge, is the most widely used market volatility index. The index is based on S& P 500 index options and forecasts market volatility for the next 30 days. Because the market volatility index measures expected volatility, it also measures market risk and sentiment.
What happens when volatility increases?
The price rate of a stock rises or falls over a given period is known as volatility.
More stock price volatility frequently translates to higher risk and aids an investor in predicting future variations.
High volatility is defined as a stock’s price fluctuating fast over a short period. Low volatility is defined as a stock’s price moving up or down slowly or being reasonably stable.
Historic volatility is determined using a series of past market prices, whereas implied volatility is computed using the market price of a market-traded derivative such as an option to look at predicted future volatility.
Governments have a big role in regulating sectors’ impact on the economy when it comes to trade agreements, laws, and policy.
Volatility isn’t always market-wide; it might also be specific to a single company.
Positive news, such as a solid earnings report or a new product that is impressing customers, can boost investor confidence in the company. If a large number of investors want to acquire it, the stock price may rise as a result of the increased demand.
A product recall, data breach, or negative executive behaviour, on the other hand, can all cause investors to sell their equities, lowering the stock price. Depending on the size of the company, this positive or negative performance may have an impact on the larger market.
Economic data is also necessary because investors are more likely to respond positively when the financial system does well. Monthly job reports, inflation data, consumer spending figures, and third Quarter calculations can all have an impact on market performance. On the other hand, if these fail to meet growth forecasts, markets may become more volatile.
Volatility will be high owing to the fiscal year. In the absence of any positive news flow, markets are expected to stay range-bound, so investors should continue to invest in pockets with a fair margin of safety.
Edited by Prakriti Arora