For the average investor, the market's jarring movements this week left many on the sidelines, thinking back to the market fallout in 2008. But for traders, the market's wild swings were welcome news. "Volatility is the friend of the trader," says Dan Burrows, senior writer for DailyFinance. "The bigger the swings, the bigger the score."
Over the past week, the Dow ($INDU) has made 11 triple digit moves over the last 14 sessions as the S&P Volatility Index (VIX.X) jumped 75%. Following last week's near 1,000 point drop, stocks rebounded strongly on the news that the European Union would plow nearly $1 trillion, as needed, to curb the economic crisis. On that news, it seemed that the stock market's correction was over and that stocks would rebound. But as the week progressed, worries over a slowdown in economic growth in Europe picked up sending the Dow down 163 points on Friday.
"All the deficit-challenged countries in the Eurozone, which technically means all of them since none come close to meeting the Maastricht budgetary targets, could be facing severe deflation pressure in the future based on the amount of slack in their economies," wrote David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, in a Friday note to clients.
Deflation, of course, is a debtor's worst nightmare, since money borrowed today would be more expensive to pay back later.
"Everyone is terrified that the budget cuts that will be necessary in Europe to service these debts is just going to crush European economic growth," says Burrows. "That is going to hurt everything."
It's not clear what next week will bring, but one thing seems likely: Market volatility is not going away. In the meantime, long-term investors will do best to wait on the sidelines, leaving the speculation game to traders.
What is Short Selling?
Make a profit when stocks prices fall.View Course »