Reversal of fortune is the name of the game in financial markets. Today’s high-flying stocks can become tomorrow’s flops, while currently overlooked shares can find favour.
The same is true of stock indices. Today’s hot index can be ignored tomorrow while one languishing today can find itself with a fan club of investors and traders.
Just look at some of the risers and fallers in November thus far. Of the top five risers, one had started the period as a major faller before surging to the top of the table. And of the top-five fallers, two were demoted from positions among the top-five rising stars as the month dawned.
A spectacular example of this demotion can be seen when one studies the VIX Volatility Index, which measures expectations of future volatility by looking at option prices. This index reflects the market’s view as to the likelihood of the level being reached at which the options would be triggered.
Trade VIX Volatility Index - VIX CFD
As October turned into November, the VIX was riding high, leading the pack of risers. Unsurprising, perhaps, given that volatility is a dominant theme of our times. From Brexit and the potential impeachment of Donald Trump to the US-China trade disputes and conflict in the Middle East, the VIX seemed an index made for 2019. Surely the only way was up?
It is, however, a fundamental aspect of financial markets that what goes up must come down, and so it has proved.
Hong Kong tumbles
Another index that entered November with its head held high but has since fallen on its face is the Hong Kong 50. With its who’s who of big business in the former colony, including HSBC and Swire Pacific, it seemed to be riding out the intense civil protests that have wracked Hong Kong in recent weeks, but no longer.
Across the border in China, by contrast, is an index that was a faller at the start of November and remains one now, the China A 50, which contains A shares, those issued in yuan and traded on the Shanghai and Shenzhen stock exchanges.
In the same category is Madrid’s IBEX 35 index, which has yet to see a reversal of the ill fortune that dogged it as October drew to a close. A newcomer to the top-five fallers is the Swiss 20 index, containing such world-renowned names as UBS, Zurich Insurance, Swatch, Nestle and Credit Suisse.
Intriguing Brexit trading
Two of the previous leading fallers do not currently figure, doubtless to the relief of those who operate the markets concerned. They are the S&P/ASX 200 index in Australia and the Singapore 25 index.
What of the risers? None of the current top five featured in an equivalent list at the start of the month, but interestingly one – the CBOE Brexit High 50 – did feature as a faller. It contains companies that have a high dependence on domestic British revenues, thus would lose out from a “hard” Brexit that disrupted the home economy.
One may have thought that the uncertainty surrounding the UK general election has persuaded traders and investors that a “hard” Brexit – one where Britain leaves the European Union with no agreement – is less likely, making the Brexit High 50 more attractive.
But there is also a Brexit Low 50 index, which features those firms with a low dependence on domestic revenues. Such firms are not only protected against a hard Brexit but may actually benefit from it given any fall in sterling would increase the value of foreign earnings when translated into pounds.
Intriguingly, the Brexit Low 50 is also in the top-five risers, suggesting different groups of traders are taking diametrically opposite positions on the likelihood of a hard Brexit. Never has the old adage that two views make a market seemed more apposite.
Elsewhere, the risers featured Italy’s FTSE MIB index, Germany’s DAX and the Nikkei 225 from Japan. Three indices that appeared in the top-five risers at the end of October are now out of the running: the Netherlands 25, the Euro Stoxx 50 and France’s CAC 40.
Trading on volatility
Along with the risers and fallers are the indices whose trading patterns have been the most volatile. Here, there is some overlap with the end of October with, perhaps unsurprisingly, the VIX Volatility Index featuring in both league tables.
Other repeat performers were the Singapore 25 and the China A 50. But two dropped out, the FTSE MIB and the Spain 35, to be replaced by two newcomers, the Brexit High 50 and the Hong Kong 50.
Volatility tends to be something of which market players disapprove, given big price swings are seen as making a security a bigger risk than it needs to be. It is true that volatility arising from a lack of liquidity can be hazardous, as can volatility generated by non-transparent market conditions in which traders and investors all assume everyone has an information advantage over them.
But volatility can also create opportunity. After all, without some price movement there would be nothing on which to trade.
More generally, which will be the rising and falling indices as we head towards the end of the year? Anyone who could answer that definitively would be very rich, but perhaps the latest World Economic Outlook from the International Monetary Fund (IMF), published in October, can point us towards growth regions.
Unfortunately, there do not seem to be any. The IMF wrote: “Over the past year, global growth has fallen sharply. Among advanced economies, the weakening has been broad based, affecting major economies (the United States and especially the euro area) and smaller Asian advanced economies. The slowdown in activity has been even more pronounced across emerging market and developing economies, including Brazil, China, India, Mexico, and Russia, as well as a few economies suffering macro-economic and financial stress.”
But all is not lost. Stock indices tend to be seen as “leading indicators”, as opposed to lagging indicators such as unemployment, which tell you where the economy has been rather than where it is going.
The chances are that shares will be rising well ahead of global economic recovery.