Volatility Is Spiking, But Secondary Stocks Continue to Run Hot
Increased volatility is likely to shake out some of the trend-following trades that have been riding momentum.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
After solid action for most of the day on Tuesday, the market pulled back late in the day as another trade dispute developed between the U.S. and China. This one involves soybeans and cooking oil, but the market has already forgotten it, and the S&P 500 is already back to where it was before the news.
President Trump and President Xi are scheduled to meet in South Korea late in October, and there is likely to be some intense negotiations and positioning in anticipation of the meeting. The Wall Street Journal reports that China believes it can take a hard line, as Trump is concerned about a negative stock market reaction if he is too aggressive with tariffs.
While the market has been soothed by Trump’s comments that a deal will be made, there is little doubt that the negotiations will be very difficult and that we haven’t seen the last of aggressive trade policies.
The situation with China and the start of earnings season are likely to increase the level of market volatility. We have already seen significant fluctuations in the last few days, and that is likely to continue.
Increased volatility is likely to shake out some of the trend-following trades that have been riding momentum. It has been a very steady uptrend since April, which has made it much easier for investors to stick with the trend, but when volatility spikes, it triggers stops and profit-taking. Trend followers are reluctant to give back significant gains, so when there are pullbacks, they lock in their profits.
While volatility is likely to cause issues, there continues to be some tremendous strength in secondary stocks. The Russell 2000 small-cap index (IWM) has been outperforming and is the last of the major indexes to move deep into new all-time high territory. The speculative action in smaller stocks is helping to keep sentiment very positive, but it is a bit bubbly, and that also is a recipe for more volatility.
We have a positive open early on Wednesday with more bank earnings reports coming up. The government shutdown has delayed some economic reports, but that doesn’t seem to be an issue of concern at this point.
At the time of publication, Rev Shark had no positions in any securities mentioned.
