Today’s election in Britain should give you an idea of how volatile a market can become in a very short period of time. Since the start of the week the market has been punch drunk on assurances that the leave vote would fail in Britain. Throughout today and into after-hours trading certainty remained. A significant amount of money bet long on the assumption that a vote to remain would reinforce the status quo and bring a higher level of certainty to the market. That was shortly shattered as votes started being counted. Whether it’s the general market or currency trading, the market got a rude awakening when what was assumed to be an open and shut case turned into the exact opposite.
As an investor, dealing with this situation would have been near impossible to get right. A little over a week ago all we heard from polling and the media was that the leave vote has gained strength and then for about the last week the opposite was the case. The market sided with the most recent trend believed; a stay vote victory. Major financial publications, such as the Wall Street Journal’s Barron’s weekend publication led the charge. Confidence continued to build.
The confidence that was built has now crashed. Investors on the wrong side of the trade are going to move to get out and other investors will pile on to sip from the downstream of market momentum. The situation is ripe for an overreaction in the opposite direction versus the positive reaction seen throughout this week. Uncertainty is a dangerous animal in the investing world.
Again, as I have said before, the fact that we have a greater share of risk-adverse investors in investments with greater risk profiles creates a situation where average volatility can lead to exacerbated levels of volatility in a short period of time.
Here’s to an interesting Friday.