Blogs & Comment

Much ado about nothing?

All that activity, and nothing much to show for it.

(Illustration: Medioimages/Photodisc/Getty)

If you look at the Toronto stock market’s recent performance, one might say it’s a tale of two markets. On the one hand, there’s been a lot going on. On the other, not a heck of a lot.

Case in point for the ‘much activity’ view: in the six trading days we’ve had since the end of the third quarter, we’ve had three days in which the S&P/TSX Composite Index either rose or fell by at least 2% on the day. Two of those were increases of 2.50% and 2.82%, and one was a decline of 3.20%. Only one of those trading days showed a change of less than 1%.

That’s a lot of volatility, relatively. For example, since the beginning of this year, January 3, 2011, we didn’t have a 2% move in the markets until July 27. We had six in August, and four in September. That’s it: a total of 11 moves of 2% or more in nine months, and three in six days so far in October.

The heightened volatility is also manifested in the Canadian VIX index. Run a one-year graph of this indicator of investor fears, and you’ll see a relatively flat line along the 15 level from this time last year right to the end of August. After that it jumps vertically to the 30 level, hitting a high of 39.67 on October 4 before falling back to its current level of 27.75.

Canadian investors, then, are very jumpy of late, very fearful. In the three trading days from September 30 to October 3, the TSX fell each day, including a 372-point drop. The following two days the market rose by a total of 602.16 points. The next day, down 191 points, and the next two, up 442 points.

Now for the ‘not much activity’ view. And for this idea, I have to credit a commentator (whose name I didn’t get) I heard on the radio yesterday. He said that if people had been out of the country on vacation for a little while and came back, they’d wonder what the fuss has been all about.

And so I checked. Despite all the volatility we’ve seen in October this year, and described in detail above, the TSX Composite is up a net 406.12 points. Yes, in September the TSX lost a net 1144.86 points, but as of yesterday the market is back to the level it was in early August, almost exactly two months ago.

Now, I’m not saying that two months with no returns is a good market, not in the least. What I am saying is that if the market has not net moved in two months then we needn’t get too drawn into the intraday and day-to-day volatility we’ve been experiencing recently, especially if the market is net up so far this month.

As I’ve said on multiple occasions, the listed options market provides investors with opportunities to exploit all kinds of different market situations. In this particular case, we have a sideways but slightly up market, and high options premiums in terms of a bloated VIX index. Short straddle time anyone?

I won’t say more, or people who don’t sufficiently understand options might try to do something they shouldn’t. But what such people could do is bone up on the subject now so that they’re more ready next time an opportunity comes up.

Happy investing, and don’t let the volatility get to you. Take the long view!