Extreme Confluence of Inactivity Breaks Records, May Signal End

Extreme Confluence explained by professional Forex trading experts the “Extreme Confluence” FX trading team.

Extreme Confluence

Unless you have been completely removed from the markets over the past few years, the degree of extreme inactivity measured across the financial system is a familiar sight. Whether we measure through pacing, ranges or derived implied volatility; the severe degree of inactivity is evident. A consequence of this unprecedented degree of quiet is a measure of complacency that we have not seen in the modern financial era. Further – and perahps more destructive – the remarkable constraint has translated into complacency and a wreckless pursuit of risky exposure.

We are heading into the final month of 2017, and history suggests a further seasonal deflation is ahead of us. Yet, what can a cyclical reduction in activity do against a backdrop of already-extreme quiet? Will this situation persist indefinitely or will the sheer disparity of the market prompt its own rebalancing? We take a look at some of the seasonal and structural measures of our current predicament and weigh what the next phase may mean for the markets and our trading.

It is Very Very Quiet

It is difficult to articulate just how complacent the markets are at present. We could point to the excessive use of leverage, the extreme heights of capital benchmarks like US indices or weigh in on the record low rate of collective return on the same measure of risky asset compared through history. Then again, we don’t have to be so abstract to illustrate our circumstance. The below chart of the VIX Volatility Index (S&P 500-derived, 1-month implied activity measure) denotes all the times in the measures’ 27 year history that it had closed below 10 – an extremely rare low. Prior to this year, that tally was a sparse 9 days. In 2017 alone though, we have seen 44 such instances. Are conditions simply that clear and quiet or is this a strong contrarian reading via complacency? I suspect the latter.

Extreme Confluence Conclusion

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