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Investing means sounding out markets

Investing means sounding out markets


THE market sentiment is accompanied by a distinct sound, according to one particular American financial expert, and lately that sound might just be laid-back ballads.

According to Phil Maymin, an assistant professor of finance and risk engineering at the Polytechnic Institute of New York University, there is a direct correlation between the volatility of the stock markets and the type of music people like.

Surprisingly enough, at times of high volatility (as has been the case since the start of the downturn), people tend to like soothing music. During periods of low volatility, they prefer heavier music with a more frenetic beat.

Maymin came up with his findings by comparing data marking the standard deviation of the returns of the S&P 500 to the music people listened to during the years 1958 to 2007.

The November 2008 report predicted that people would be listening to less volatile music as a result of the ensuing volatility.

Although Maymin's study provides an interesting aside, the Volatility Index - the ticker symbol for the Chicago Boards Options Exchange (CBOE) - is the main instrument for measuring market ups and downs by tracking volatility S&P 500 index options. It is often referred to as the stock market's fear gauge, and the higher its value the more volatile the market is perceived to be.

Last month the VIX - which tends to rise as investors try to protect themselves against increasing risk by buying options - rose 17 percent during the course of a day's trade, and lately the VIX has been trading in the mid-to-late 20s. Its 52-week high is 89.53, whereas its 52-week low is 19.22.

Volatility breeds uncertainty, and there are those who are reluctant to put money away for their future.

However, now there is a chance to capitalise on this market volatility by investing in structured notes directly linked to the VIX.
Such notes give investors the chance to profit by putting money in a particular segment of the market, and also minimise the potential loss.

If the price on a certain date - a predetermined quarterly date - for each of the first three quarters is equal to or higher than the price at launch, then it will pay out the investment plus a percentage return.

As always, such structured products - even those that specialise in volatile markets - allow an investor to make gains up to a certain amount while at the same time limiting the level of loss.

So, for those with an appetite for the current market volatility, such an investment might be the way forward during a time when little is certain.

For those of us with weaker constitutions, it's probably a time to try to forget about the severe ups and downs that have dominated in recent weeks.
Just keep playing that relaxing music.
Trevor Keidan is managing director of
Infinity Financial Solutions. Should you
wish to contact Trevor send an
email to [email protected].