Volatility can indicate a rebound for stock markets

The impact of global economic interplay was clearly visible in the stock markets last week. The sharp decline in commodity prices arrested the decline in the domestic stock markets and brought about some stability, albeit with a high degree of volatility.

The debate over the extension of the second round of quantitative easing (QE2) in the US contributed to the correction in commodity prices. Renewed anxiety over Europe's debt crisis, concerns over runway inflation in Asia and political turbulence in West Asia has left the global markets nervous.

Investor nervousness, as usual, brings on nothing but volatility. The current market volatility has shown how inter-related the global economies are, and how investor sentiment can change quickly as the direction of the markets change. It can be seen from the fact that just a rate hike ago, the domestic stock markets as represented by the Nifty was near the 6,000 level due to copious inflow from foreign institutional investors (FIIs). Now, less than a month and a steep rate hike later, the markets are down by five percent month on month.

Volatility precedes change in direction


Many investors think a high degree of volatility indicates a problem. But, many market experts think otherwise. Analysts believe that increased volatility can indicate a rebound for the markets . Usually, volatile market movements precede a change in the market direction.

A high VIX appears just before a market rally, and a low VIX usually augurs a slide. Hence, investors should find strategies to deal with market volatility rather than be frightened of it.