Education

The strangest index for the rainiest of days

What to look for when markets turn

We
are undoubtedly in the bull-iest of bull runs, which has made market watchers declare:
Bully! The problem is that this bull seems to be running through a tech stock
china shop. In the past few months we have Facebook take a significant dive
after the Cambridge Analytica controversy and in the past few days we have seen
Tesla stock flutter around like a drunken butterfly.

Although
we shouldn’t be all doom and gloom, there is a fair number of respectable
market analysts (including Hungarian prosecuted Hungarian-American investor,
George Soros) that believe this bull economy is headed at a flat out run
towards the peak of a bubble.

Most
investors seek safe havens when volatility increases – and even if you trade
indices
, there is a certain index for those rainy days (or when the
bubble bursts).

Hedging vs. Safe Haven

There
are two distinct ways to deal with increased risk of volatility or rapidly
fluctuating market conditions – but these two risk management methods are
distinctly different.

Safe Havens – safe havens are
generally considered indices that would likely not be affected by market
volatility or even rise in value during market distress. This is usually due to
an abrupt increase in demand when markets become “choppy” and investors become
skittish.

Hedges - these are assets that are
usually inversely (or negatively) correlated with the positions an investor
already holds or intends on opening. 

Example of Correlated Indices

Using
a hedge lowers your risk but also your potential return, since in a healthy
trading strategy risk/reward is a ratio. You need only a very simple
understanding of mathematics to understand that when one number in a ratio
increases the other decreases as it is divided by the first.

Safe Haven Indices

First
and foremost, avoid anything tech, (we’re looking at you NASDAQ), because these
indices tend to be volatile even when markets are relatively calm.

And
here’s the twist to this worrisome story – look at the two charts above, the
S&P 500 (SP/USD) upon first glance looks more volatile than the
actual US Volatility Index (VXX/USD). Christopher Stanton (Sunrise Capital’s
Chief Investment Officer) seems to agree that perplexingly enough – the US
volatility index has become a safe haven, he
believes
people should go long on.

Only
with slight extrapolation, we can assume that volatility may continue – the
trade conflict isn’t going to go away overnight, inflammatory tweets aren’t
going to stop until 2020 (fingers crossed) and politically driven sanctions
aren’t going to be raised anytime soon. On the other hand, compared to its
global counterparts the S&P500 seems to be holding up decently:

DAX/EUR

CNX/USD

ASX/AUD

ESX/EUR


SP/USD

The Classic Safe Havens

When
talking about safe havens you could easily replace the word with Swiss franc,
if you conveniently forget the removal of the currency’s peg to the euro –
which caught many a banker with their pants down. But again, let’s selectively
ignore that due to the franc’s relatively solid track record.

Gold
in recent months has performed surprisingly lackluster – going from low to low.
Is this haven of haven’s being dethroned? In previous periods gold was tightly
inversely correlated with volatility. Unfortunately for gold traders, this
relationship seems to be becoming looser and looser.

These
old markets seem to have undergone a radical “face-lift”. Relationships which
were assumed to be stable are now dynamic and assets such as certain
cryptocurrencies have emerged at points as safe-havens. Oh, and a reality show
star is now the incumbent leader of the “free” world. In these kinds of market
conditions risk management should be pretty high on your “to do” list.

Partnering
with a broker that not only offers you access to multiple diverse indices but
also provides you with transparent pricing and fair trading tools
can only help.

This
article was submitted by easyMarkets

ForexLive

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