E Nervous Investors Turning To 'Risk-Off' Trades

The U.S. dollar fell against its major rivals on last week after a pair of weak datapoints raised new questions about the strength of the economy. Also pressuring the dollar lower were comments from U.S. President Donald Trump that the greenback was too strong and that he would prefer the Federal Reserve keep interest rates low.

Gold was up about 2.6% last week for its biggest weekly gain since June, as concerns over tensions in North Korea and the Middle East kept stock markets under pressure. Treasuries advanced last week as geopolitical jitters and comments by President Donald Trump continued to fuel a bid for government bonds. Investors took advantage of the temporary weakness in the U.S. currency to pile into Treasuries, market participants said.

You can see in the chart below how gold has returned as the top performing asset. Investors are getting more nervous about global uncertainty converting to “risk-off” asset classes for protection. As seen in the chart below, the major stock indexes have been confined in a tight trading range the past few months. Gold and treasury bonds are moving up fast as investors have returned to “risk-off” trading.

C:\Users\Gregory\Box Sync\Investments\Blogs\TalkMarkets\04172017\30 Asset Performance Graph 04172017.jpg

The CBOE Volatility Index (VIX) is known as the market’s “fear gauge” because it tracks the expected volatility priced into short-term S&P 500 Index options. When stocks stumble, the uptick in volatility and the demand for index put options tends to drive up the price of options premiums and sends the VIX higher. As we recently pointed out “…as equity prices have faltered a bit the past few weeks’ investors are starting to show signs of nervousness by driving the VIX higher…”

In the updated chart below the Volatility Index is at the highest level since last November. Investors have gotten nervous heading into quarterly earnings season and are putting hedges in place as protection. Last week we mentioned …uncertainty among traders – they are not willing to sell off equities, but not quite ready to commit to bidding prices higher… In the current trading environment market neutral and short term directional trades have been profitable for us… S&P Financial sector stocks crashing over concerns about the timing of future rate cuts…” Tight stops should be the top priority given the persistent downside price pressure on the overall stock market.

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