From the wires:
Jerry Webman, chief economist at Oppenheimer Funds Inc., said the swift pullback in stocks after the day’s economic readings illustrates the fragility of investor sentiment. He said the market’s volatility reflects an undercurrent of uncertainty and efforts by some traders to capitalize on shifts in the mood. “We react very strongly to bits of news,” he said. “The whipsaw danger is pretty high here.”
I don’t believe that any analyst can accurately predict when whipsaw danger is highest…whatever than means exactly!
August 8th, 2008 at 7:37 am
I’ve got to disagree. Volatility is caused by people reacting strongly to whatever it is they react to, so it seems a bit of a tautology - if volatility is high, then naturally you will get whipsawed out of positions more than you would during less volatile periods. It is afterall what we know already; volatility is noise, so if the noise gets louder it is harder to discern the trends through it.
What this means is that you will find more buy and sell signals thrown off by a trading system when volatility is higher. Just imagine listening to someone talking on a radio with lots of interference, it’s harder to understand than with a clean signal. You may have to listen to something several times to understand it, which is akin to having to open a position several times as you keep getting taken out by close signals from your system.
So, if you look at the VIX (volatility index) and see it is high compared to the average then yep you will get whipsawed more than when it is lower, hence the danger is higher. I do agree that he is basically saying nothing beyong the obvious though….people are currently running around like headless chickens!!
August 9th, 2008 at 7:43 pm
It would seem to me that if one is trading a system that adjusts for volatility then the likelihood (not “danger”) of a whipsaw would be about constant for any type of market. But who cares anyway? Whipsaws are a normal part of trading, especially trendtrading. The only “danger” I see is not adjusting for volatility, not expecting to be whipsawed, etc. Danger comes from how one approaches the market, not the market itself.