One thing that we had to write about very often, with respect to the markets, was the severe lack of volatility. In fact, this past September had the lowest volatility – EVER. And with a lack of action, there is always a dearth of volume. When both are missing, day trading is extremely difficult. The opposite happened today: volume and volatility were huge.
What caused all of the swings? There are several good reasons, but we believe that the two main culprits were the extreme drop in the Japanese stock market, and the constant leaks the Senate tax bill.
All was going well in Japan as the indices were rallying yet again. Early in the morning the Nikkei made a new multi-decade high, and the Topix index notched a new 26-year high. Shortly thereafter, however, profit takers came in. From the high of the day to the low of the day, the Nikkei 225 plummeted about 3.7%. But don’t worry for the Japanese investor, the buy-the-dip (any dip) trader came in to massively reverse the 850-point drop. It closed down only 0.2%.
With this crazy action, as well as further Middle East turmoil, the overnight session S&P500 futures were quite a bit lower, which caused the aforementioned volatility. What’s more, when the market opened, the volatility increased. The price action acted as if it was attached to a young boy’s yo-yo. These wild swings morphed into a strong trend lower when leaks of the Senate tax bill hit the tape, which suggested that the corporate tax rate would be delayed until 2019.
One wonders what Friday will bring? As long as the wrangling over the tax bill continues, expect more quick moves in the markets.