Market Insights

Markets are making big moves as investors and traders consider the impact of tariffs. This article will cover some key points about increased volatility.

First, volatility measures stock movement. It shows annualized price changes based on a defined period (like the past 10 sessions). Volatility tends to work both ways, with big moves both to the upside and downside. This can favor short-term intraday trading on both the long and short side.

Second, volatility and correlation tend to increase as prices fall. Once indexes like the S&P 500 or Nasdaq-100 decline, investors often “de-risk” by exiting positions. This creates a cycle of widening declines as selling spreads across markets. Correlation increases as stocks tend follow the broader index, rising and falling in unison.

The Volatility Cycle image on the right highlights this process. Big indexes often drift during periods of calm as investors focus on the company-level fundamentals. That lets individual stocks move independently of the market, a phenomenon known as dispersion. But then when selling begins, stocks may fall in unison as volatility rises. The increases correlation.

Third, price ranges tend to widen as volatility climbs. Traders can make — or lose — money more quickly. They may react to the bigger and faster moves by reducing position sizes.

Fourth, volatility often peaks before it ends. Traders may watch the Cboe Volatility Index (VIX), which measures pricing of options on the S&P 500. One potential technique is to wait for VIX to spike toward 40 and drop before buying stocks more confidently. (VIX, also known as the “fear index,” typically moves in the opposite direction as the S&P 500.)

Some chart watchers also use VIX for divergence. That’s when the S&P 500 makes a lower low and VIX makes a lower high. Such patterns occurred at other bottoms like October 2023 and March 2020.

E-mini S&P 500 futures (@ES), daily chart with select indicators. Notice how volume and volatility typically increase when prices fall. 

Fifth, futures may be useful at times of volatility because they trade around the clock and track major indexes. CME has also introduced Micro contracts at one-tenth of the size of traditional E-minis, which can potentially help traders scale positions at times of increased movement.

Finally, futures may be especially relevant because news events are happening outside of normal stock-trading hours. China announced retaliatory tariffs against the U.S. in the overnight session and tonight President Trump will deliver his State of the Union Address at 9 p.m. ET. Such unusual timing, combined with increased volatility, could potentially make futures more relevant in the current environment.

Security futures are not suitable for all investors. To obtain a copy of the security futures risk disclosure statement visit www.TradeStation.com/DisclosureFutures.