September is typically one of the more important months when it comes to understanding market trajectory for the subsequent months. For the financial sector, September price action in particular is regarded as crucial to the outlook. However for markets at large, September means back to business after the summer vacation months, typically translating to better trading volumes and liquidity. This September has proved anything but normal as the volatility of volatility spins rapidly out of control. Increasingly dramatic intraday price swings in commodities and equities have come to dominate the price action. The increased choppiness is very much reminiscent of 2008-2009 when swings of several percent were commonplace. Oil prices in particular in the past few months have seen daily movements often in excess of 4% in both directions, highlighting the challenges facing investors, especially for those placing pending orders and utilizing stop-loss orders. The volatility of volatility however is complicating the outlook for many investors as sentiment shifts increasing bearish. Equities in particular have been one of the epicenters of volatility, namely emanating from Asia.
Problematic liquidity conditions and margin calls have spread across the globe, creating panic induced trading conditions during certain sessions. On the one hand, some days are particularly devoid of any volatility, like S&P 500 futures trading during Monday and Tuesday. In the opposite extreme, Japan’s Nikkei 225 index rose 7.70% yesterday, recording the steepest rally since 2008. Factors contributing to the increasingly volatile conditions include the upcoming FOMC decision. While increase financial insecurity across China is certainly playing a role in deteriorating market order, the Federal Reserve’s plans to raise interest rates are also to blame. Volatility remained low for such an extended period of time since the last financial crisis under the central bank planned paradigm that the desire to dictate the narrative led to greater entropy and more chaotic execution. These conditions are unlikely to abate regardless of next week’s decision. These trends in volatility will force traders to widen risk and reward to compensate for the renewed uncertainty that is likely to foment even greater volatility than already experienced.