Turn up the vol(ume)atility, drown out what really matters

From the epic movie, The Hunt for Red October, the following series captures what happens when volatility spikes in the markets:

 

“They’re pinging away with their active sonar like they’re looking for something, but nobody’s listening.
Captain Davenport: Well, they’re moving at almost forty knots. At that speed, they could run right over my daughter’s stereo and not hear it.
Jack Ryan: They’re not trying to find Ramius, they’re trying to drive him.
Captain Davenport: Drive him where?
Jack Ryan: Hounds to the hunters.

Captain Davenport: Your Russian’s going to make it to America, Mr. Ryan. He’s going to die within sight of it.

 

Likewise, when volatility is running at 40 knots, economic data, earnings releases, etc go unnoticed in favor of technical stampeding to arbitrary trend lines such as simple moving averages. The Ted Spread(a measure of stress in the payment system) hasn’t budged.  The LIBOR-OIS Spread is completely contained. Jobless claims, retail sales, housing starts, etc are pointing toward improving economic conditions and do not portend, in any form, recession.  Recessions end bull markets, volatility does not—don’t allow the hounds drive your portfolio to the hunters.

 

Jamie Cox
November 4, 2014

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