What to expect from bone jarring volatility in the sharemarket….

AJ Financial PlanningAustralian Shares International Shares investingWhat to expect from bone jarring volatility in the sharemarket….

A very good friend of mine a few years back undertook one of Australia’s most gruelling 4WD adventures know as the “Canning Stock Route”.

From what I have heard of the journey, it navigates its way up through the middle of W.A. and I believe it is up there with one of the most challenging routes in the world of 4WD adventures!

In my eyes, just the drive alone from Melbourne to Perth would be enough of an adventure but apparently that is considered the easy part of the trip!  During the adventure they faced a range of challenges – one of them being the long distances of corrugated dirt roads.  Apparently the brutal force of this constant vibration is enough to send your cars shock absorbers into melt down and leave you lying in bed at night vibrating long after the car was turned off!

The last few weeks we have seen significant volatility in the market.  It has been a number of years since these readings were so high. The below graph is the volatility readings of the S&P 500 in the US. 

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                  Usually high volatility in A market with wild fluctuations indicate a sign of uncertainty of the path of ahead.  So what can we expect moving forwards?

Well, normally when there is a sudden sell off, there is a low formed.  Normally you see a brief bounce and then usually the market might rollover again and retest the recent low.  During this time you will normally see wild fluctuations up and down.

Below is a picture of what has happened in the past.  The red arrows below are the lows and retests.  It is not to say this happens every time exactly, but historically this does occur a lot.

In the 2007 event the market rolled further before bouncing and retesting.  However in the 2011 example it rebounded and continued onwards.

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                  Shortly we will see the future direction of the markets.  During this time however we are certain to see continued wild swings up and down until this direction is confirmed.  It is important to navigate cautiously during these times with one eye open for opportunities and the other for any increasing risks on the horizon.

Like the bone jarring 4WD road trip on the Canning Stock Route, it is important that you don’t become too fatigued and become sidelined on the side of the road with the shock absorbers melted down, as you might just miss the important sign post which will point you in the future direction of the market.

Like all interesting investment ideas however, it is important that you seek professional guidance before implementing anything we have mentioned in this article.  We would of course recommend our team of expert advisers at AJ Financial Planning.