GFG Capital Co-Founder Eduardo Gruener recently provided insights into the current market volatility in an article published in ValueWalk. In this piece, Gruener discusses why this year’s market volatility is, in fact, statistically normal.
Gruener explains that most of the investors who are fearful that the stock market’s last few weeks are warning signs of another recession are merely caught off guard due to last year’s abnormally docile environment. “The return of volatility, albeit sporadic, this year has forced investors to reassess their capacity and tolerance for true equity behavior,” Gruener states.
It is crucial to not just look at a single day, or even a few days, in order to get true insights into the current state of the stock market. Instead, Gruener believes one must keep an eye on the long-term while also respecting the sudden increase in volatility – and the most accurate way to do this is by focusing on the 200-day moving average.
“Nothing good ever happens below the 200-day,” explains Gruener. “Conceptually, just think about what the 200-day moving average tells you. If the average price of the index for the last year (+/-) is higher than today’s price: investors aren’t convinced that tomorrow will outpace where we just came from.”
Gruener anticipates that investors will soon return to their pre-market volatility trading habits moving forward, as historical data indicates. According to Gruener, “Trends below their moving average are often times unhealthy, erratic and unstable conditions to be investing in. The length of stay below water is never consistent, but we do know without tangible evidence of an economic slowdown around the corner, that the surface shouldn’t be too far out of reach.”