Over the last few weeks, we have seen a huge increase in global stock market volatility. It really started with the United States Federal Reserve cutting interest rates on July 31. The rate cut essentially took place because of the trade war between China and the U.S. Fed Chairman Powell pretty much pointed to the uncertainty in trade as the biggest driver behind the rate cut. The economic reports have shown that the U.S. economy is in much better shape than most other countries.
After the rate cut by the Fed, investors got a little spooked because the Fed didn’t commit to more cuts. That news was a little concerning, but President Trump caused everyone to forget about the Fed later that day when he announced another round of tariffs on Chinese goods. This caused stocks to drop for a second straight day. The hangover lasted another day and stocks fell again on August 2.
China retaliated and made some announcements regarding the trade war. They halted agriculture imports from the U.S. and they let the Yuan slide in the foreign exchange market. Stocks took their worst loss of 2019 on August 5.
After the close on August 5, the U.S. labeled China as a “currency manipulator” and futures fell sharply in after-hours trading. China responded by adjusting its target exchange rate—China doesn’t allow its currency to freely trade against other currencies and instead has a target range that it pegs to the Dollar. They had relaxed that target a little and the Yuan fell to its lowest level since 2008.
On August 6, China bumped its target peg with the dollar and the People’s Bank of China surprised investors with a higher target peg than was expected. This helped stocks recover a little on Tuesday.
Futures fell sharply once again on August 7 and when the stock market opened, all four of the main U.S. indices were sharply lower—the S&P was down close to 2%. This time the main reason for the decline was interest rate cuts in the Asia-Pacific region. The central banks of India, New Zealand, and Thailand all made cuts to interest rates in their country. The central bank of the Philippines followed suit with a rate cut on Thursday.
The trade war between the U.S. and China has had a great impact on the economic activity in the region with countries relying on trade with both of the economic giants.
As someone that invests and trades in the financial markets, this increased volatility has been crazy. I will say that I have been fortunate and have seen decent gains in both my own account and with the newsletter that I run. That doesn’t mean that I am happy about the crazy swings in the market.
The biggest problem I have with the wild swings is that they are unpredictable and the tools that investors and traders would usually use aren’t as useful. When markets are moving based on economic or financial factors, there are many different tools or strategies that can be used. When the driving forces behind the big swings are political in nature, my normally reliable tools are of little use.
One indicator that I use is what I call my barometer—it measures the pressure of the market and helps me prepare for short-term swings in the market. I developed the tool back in 2009 and have used it regularly over the last 10 years. It isn’t perfect, but no tool is able to perfectly predict the market.
The barometer uses scans that I run every night and have since January 1, 2009. The scans produce a bearish list and a bullish list based on a number of different factors—overbought/oversold indicators, volume, moving averages, etc. The barometer readings typically range between -40 to +40, but can get much higher or much lower. The highest reading I ever had was 178.4 and that came on December 26, 2018—right as the market bottomed and took off on an incredible run. The lowest reading I have ever had was -139.7.
When I get the big readings, negative or positive, it is normally a pretty good sign that the market is getting ready to make a big short-term move. I got a reading of 104.7 on Wednesday, August 7 and that was the highest reading since the big one in December.
This high reading in my barometer makes me think the market will rebound in the next 10 days or so, but I have to go back to what is driving the swings in the market – political factors. Can I count on a normally reliable tool right now? I don’t know, but I developed the tool so I have to give it a try.