Making noise but going nowhere

Dec 3, 2011

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
In the last three months, the markets have been extremely active. Every week something interesting is happening in the global economy that causes the markets to move large amounts in a short space of time. This week, markets shot up due to coordinated global central bank action to increase dollar liquidity. In the previous weeks, markets were crashing due to fears of a destabilizing Eurozone default.

Over the course of the last three months, a lot has changed in the global economy. What about the stock market? The stock market tends to respond quickly to global economic events, and recently has seen large up and down movements. This is no surprise given the news we read everyday. ---------------- Revised And Updated Edition Of "Multibagger Stock Ideas" ----------------

You are only a step away from getting your hands on to this exclusive 16 page stock market report by Equitymaster - Multibagger Stock Ideas.

To claim your Free copy of this report, all you need to do is reconfirm your FREE subscription to our daily e-letter, The 5 Minute WrapUp.

Quick! Sign Up Now! Click here...


However, if we look at the total stock market movement over the last three months, we find something quite surprising. On 2nd September 2011, the BSE-Sensex closed at 16,821. On 2nd December 2011, it closed at 16,845. This is a movement of 0.1%, tiny in comparison to movements on a daily basis. Essentially, the stock market has made a lot of noise in the last three months, but has gone nowhere.

Over the course of the last three months, most of us would have probably become more pessimistic about future market prospects. Most of the news in the financial press over this time has been negative. And yet, despite primarily negative news, the total stock market movement over this time has been almost nothing.

While the overall stock market may not have changed, one thing about the market has changed in the last three months. I'm talking about the volatility of the stock market. Stock market volatility has increased dramatically in the last three months. On a daily basis, it is not uncommon to see movements of 1%, 2% or even greater.

So how should we interpret the current market situation? What we have is extremely high volatility with no directional trend. The fact that there is no overall direction probably means that the market is cautiously optimistic. If the market were pessimistic, we'd have seen a large fall. If the market were optimistic, we'd have seen a large rise. If the market were optimistic, but still unsure of what would happen, we get no directional trend. This is where we are now.

The excess volatility means that the market is extremely sensitive to news events. It implies that a lot of movement is based on sentiment factors rather than real fundamentals. Bouts of optimism and pessimism are driving the stock market, rather than news about earnings or other fundamental factors.

This can often be painful for those holding a stock portfolio, as values may change quickly with little or no fundamental basis behind it. However, it also presents a good opportunity to find mispriced stocks. Its highly likely that over the course of the last three months, many individual stocks have moved significantly, yet their fundamentals have seen little or no change.

Though the market has been making noise but going nowhere, it is probably likely to start trending in a particular direction sometime soon. At some point, this debt crisis will start to play itself out and a lot of uncertainty will get resolved. As this occurs, volatility should fall and the market will slowly return to normal.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Making noise but going nowhere". Click here!

1 Responses to "Making noise but going nowhere"

ashraf shaheen

Dec 4, 2011

volitality is natural with stock market.i think investors should wait till we have some strong signals from europe and usa.BETTER to make lesser and selectiv purchases in pharma and fmcg sector and keep cash reserved for future investment.we must not forget that when stock market falls we get even bluechip companies at throw away prices. Remember 2008 crash

Equitymaster requests your view! Post a comment on "Making noise but going nowhere". Click here!