“The Only Thing That Is Constant Is Change.”― Heraclitus
The only thing certain about the market is uncertainty.
The US FED seemed quite confident that they’d be raising interest rates twice this year just a few weeks ago. Now they aren’t sure of even a single raise, given an unexpectedly dismal job creation number as well as uncertainty surrounding BREXIT.
Will BREXIT – Britain’s exit from the European Union – happen? While public polls and debate remain unclear, signals from the financial markets are less so. European hedge funds all assert that Britain will not leave the EU. Simultaneously, UK equity funds have seen the second largest outflows of money in recent history. There is a saying in capital markets: the time for fear is when everyone is uniformly bullish. When vested interests – hedge funds – all assert that BREXIT won’t happen, the probability that it will is high. When investors vote with their feet, pull their money, their mouth is not far behind, and their collective belief is in market turmoil from a change in status.
What is certain nevertheless is uncertainty and consequent market volatility. A prior article, Twice in the Past Two Decades, pointed to the possibility of a sharp correction. The trigger for such a market move can be BREXIT, which I believe to be a strong possibility. See increased signs of volatility (VIX, VVIX) in the 1-year weekly chart?
Late summer last year saw dramatic volatility in the markets caused by fears of GREXIT or even a GRACCIDENT as some called it. A weak member, defaulting on its obligations, nevertheless managed to muster the collective will to remain in the union. The present situation is quite different, dangerously so. A strong member is looking to leave the union, in rational self-interest, and could weaken it significantly. Such action will likely have global repercussions.
Would you bet, as I do, that volatility in the markets will increase dramatically?
Disclaimer/Disclosure: I remain short SPX with a small position in a volatility instrument. Invest with caution always. I am not affiliated with any financial or other institutions engaged in investments promotion or transactions.
June 20, 2016: The rapid VIX pickup last week and similar fall today, linked to diminishing BREXIT probability, appears related to a large net SHORT position US Hedge Funds have on the VIX.