Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelertoing Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Fear Driving the Markets Go Crazy

Stock-Markets / Financial Markets 2014 Oct 09, 2014 - 10:10 PM GMT

By: Money_Morning


Shah Gilani writes: writes: It’s no surprise to you that here at Wall Street Insights & Indictments I like indicting the crooks and con artists that slither around Wall Street.

But as much as I like the indictments part, Wall Street insights are increasingly important.

It’s fun to ferret out rodents on the Street, but making money there is even more fun.

Right now it’s time for some insights on what’s happening in the market. Because it matters – a lot…

A Wild Ride

Volatility is back with a vengeance. And until it calms down, which right now it’s in no mood to do, volatility is likely going to increase.

The triple-digit moves in the Dow Jones Industrial Average we’re seeing almost daily are telling.

They’re telling us that markets are nervous, very nervous. The constant jumping out with both feet and jumping back in with both feet is indicative of nervousness. Investors are jumping out because they don’t want to get caught in a correction, and they’re jumping back in because they don’t want to miss the next leg up.

However, things aren’t exactly what they seem to be. The jumping in and out isn’t being done by individual investors – it just looks that way. And that itself is even more telling, but of something completely different.

Here’s the truth about the new volatility. First of all, it’s part of the system now. Second, volatility will always increase when markets head south or when nervousness pervades.

Volatility has many meanings, and how you slice it and dice it or measure it is another conversation, and a long and complicated one. But there’s a simple understanding of volatility that you absolutely must grasp and not let go of. All other means of describing volatility are part and parcel to the essence of the new volatility.

The “new volatility,” which I’m coining here and now, refers to the big moves (with “big” always being relative) that stocks make. Stocks come first. There is no “market” without individual stocks.

Stocks all have a bid and ask. In normal times, there are investors and traders bidding for (wanting to own) shares at prices they want to buy them at. And there are offers, prices that investors and traders want to sell shares or short-sell shares at. The difference between a bid and an offer, meaning the two prices, is called the spread.

Whenever there is nervousness, especially when a stock, stocks, or the market is going down, spreads “widen.”

The reason spreads widen is straightforward.

Say you’re an investor, or a trader, or a market-maker (I’ll get to market makers) and you are bidding for stock and prices are falling. You’re not going to be so anxious to put up a price at which you are willing to buy shares if you think you can pull your bid and buy shares lower as the price falls.

Because sellers still want to sell and buyers are getting out of the way, when a bid shows up at a lower price, sellers will quickly “hit that bid” (meaning sell to that bid) to unload their stock, or short the stock if they think prices are going lower.

Market makers (and I made markets on the floor of the Chicago Board Options Exchange and as an “upstairs” trader in stocks and other instruments) are designated (subject to regulators) traders in certain stocks. A market maker’s job is to always post a bid and offer in the stocks he or she makes a market in.

Specialists on the New York Stock Exchange are market makers, too. If you get that, you know that market makers have to be willing and able to both buy and sell the same stock at the prices they’ve posted. They have to.

Now, if you’re a market maker and the stock you make a market in is falling, are you going to keep bidding for stock and keep buying stock as the price falls? Of course not.

So what do you do? You widen your spread, making it as wide as you can within the rules that govern those parameters (wink, wink).

Welcome to the New Normal

The new volatility comes from wide spreads that are inherent in the new normal market. The new normal market has wider spreads than anyone really sees – until panic occurs, and then everyone sees how wide they get.

That’s because there just aren’t a lot of bidders and sellers lining up anymore. When I say they are not lining up, that doesn’t mean they’re not there – it means they aren’t putting down their orders anywhere.

We now have 14 exchanges here in the United States, where we once had one, the NYSE, then two with the American Stock Exchange (AMEX), then some other little ones, and finally three big ones when the Nasdaq Stock Market computerized exchange came online. On all these exchanges, investors and traders can send their orders – mostly to places that will pay them to execute in their houses.

And because stocks now trade in increments or a single penny, investors and traders don’t put down orders and just leave them out there.

The advent of decimalization on top of an increasing number of trading venues and what the confluence of those two had on volatility is a remarkable story, one for another time. But suffice it to say, they resulted in more inherent volatility.

Even when the spread in a stock looks tiny, and you think that means there’s a lot of liquidity there, you’re being fooled. What’s more important than the actual spread is the “depth of the market” or how many shares are being bid for at that bid price and how many shares are being offered at that offer price. That’s what’s important.

That seemingly “tight” spread can widen in a nanosecond if there aren’t any bidders lining up to buy stock.

That’s where volatility comes from. The big moves aren’t necessarily the result of a lot of volume of shares being traded (though that certainly adds to volatility at times).

The new volatility inherent in the system results from the fact that spreads widen really quickly. Both on down days when investors are anxious to get out at any price and on big up days when investors will pay up to get into a stock.

Volatility moves stocks quickly in either direction. The new volatility means that, even on the quietest days, volatility can spring to life in a nanosecond.

What the recent volatility, meaning the triple-digit moves in the Dow, means is that investors and traders are nervous and don’t know what the market’s next direction will be.

Because the market system has embedded new-volatility characteristics that will cause prices to gap up and gap down, we should all take the increasing volatility as an early warning sign.

Whenever markets are this nervous, it’s time to be cautious and make sure you have an exit plan, or at least a strategy to hedge any positions you have.

Source :

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules