Will volatility come back with traders who sold in May and went away? Let’s take a look at the numbers.
Sold in May and what?!
For newbies out there, know that “sell in May and go away” is one of the more popular trading adages.
The phrase, used more widely in the equities markets, refers to traders cashing in their high-yielding investments ahead of the summer months (usually June to August).
With traders out on vacations, the months following May usually see significant drops in trading volume.
This creates a self-fulfilling prophecy of selling in May followed by months of low volume (and sometimes low volatility) trading, which is why it’s better for most traders to just “go away.”
Does this mean that volatility will increase in September?
Now that summer is over, should we expect an influx of traders that will Make Volatility Great Again?
Specifically, I used the Average True Range (ATR) on the August and September months to see if there are any tendencies we can take advantage of:
1. 2017’s moves weren’t as coordinated like in the previous yearsIf you need additional proof that 2017 was a weird year, then you’ll want to take another look at the chart above.
As you can see, major currencies have been more or less in tandem when it comes to increases/decreases in volatility.
All that changed when the fire nation attacked. Or at least when September 2017 rolled in. Not only did we see significant volatility spikes, but the currencies weren’t even showing consistent volatility changes!
Which brings me to my next point…
2. Volatility changes (mostly) depend on central banks
Back in 2014 major central banks were clear with their policy biases. Draghi announced the ECB’s plans to buy asset-backed securities; the Fed confirmed that it’s working on an “exit” strategy; Mark Carney all but promised a rate hike, and the SNB straight up intervened in the markets.
Meanwhile, the pound saw a volatility spike in 2017 mostly because markets didn’t buy the BOE’s “smooth Brexit” outlook. This led to waning rate hike expectations and massive pound selling.
The RBNZ didn’t have the same problem when members said that they “need” the Kiwi to depreciate. The comdoll fell like there was no tomorrow!
You can dig up Pip Diddy’s weekly recaps if y’all want to know what happened each month, but generally, I’ve seen that certainty is key.
That is, if traders are confident about a central bank’s policy direction, then they’ll likely be more comfortable in loading up on their bets when they come back from their vacation.
3. 2018’s August volatility is relatively low
First, I’d like to point out that I only have the ATR of the currencies SO FAR this month. Don’t forget that we still have a good part of the week left for more price action!
That said, we’re looking at pretty low numbers here. In fact, it’s the lowest August volatility in five years, maybe ever! Question is, would this mean more volatility in September?
We certainly don’t lack for potential volatility-inducing catalysts. For one, many expect the Fed to raise its rates for a third time this year in September.
Since the Fed only penciled in three at the start of the year and the central bank has historically raised rates in December, a September rate hike would push the dollar higher across the board.
The pound could also see more volatility as Theresa May prepares a Cabinet crisis summit to deal with a “no deal” Brexit scenario. Duhn duhn duhn.
Last but not the least is the U.S.’ trade negotiations with China and its NAFTA partners. Now that the U.S. has made a deal with Mexico, all eyes will be on whether or not the U.S. will play as nicely with Canada. Oh, and will the Donald finally see fit to talk about China in September?
Whether or not volatility increases in September, you shouldn’t extend your vacation plans and wait until we see the catalysts.
In fact, you should start getting back in your trading zone so you’ll be prepared for whatever catalysts that may come in the next few weeks.