Extreme volatility likely to continue to plague the markets for one good reason

After taking a break from blogging about stocks, Forex and other equities I certainly haven't stopped trading them. I've been more focused on my portfolio than keeping up a blog. But I've decided to start writing again about what's on my mind and trades I'm in or going to make. There is something that worries me in this current scenario and I'd like to share it in this opening post.

If you think the markets are recovering from Monday's plunge, you may want to think again. This not just simply a 'correction' as often referred to by many traders and investors. The Dow is slowly but surely cutting its losses after the 1,100 + drop (the most I've ever seen it drop in one day), somehow almost 75% is recovered, and they make it seem like everything is just fine and it was just a 'wild ride'... but is it? Some say it was an issue with computerized trading that may have affected Monday's crash. I believe that there is something a lot more serious going on! This may just be a prelude of what's to come and set the tone for the rest of the year and beyond.

Many (new) traders forget that there's still a major underlying issue, it's something that's not much talked about for some odd reason. It's almost like no-one really wants to hear about it, even though they know it's a major indicator regarding the the state of the markets.

Since the big recessions of 2008 this has been going on. It's called the Fed rate:

The Federal Reserve has not really adjusted the U.S. Funds rate since the great recession - not to the levels seen before 2008 anyway. To me that is pretty alarming. Yet the Dow is climbing and climbing - more money is pumped into the markets, but the rate still stays the same. Does that make sense? The US dollar is still very weak, which is a good thing according to some traders and investors. 'It makes U.S. products cheap so more American goods will be sold abroad'. But it actually hurts the U.S. / global economy - it only drives up inflation and only the 1% will benefit from it. This is just another bubble that's about to burst! The same scenario we saw in 2008!

10 years ago I started this blog as a result of the market crash that happened back then. All these 'financial experts' were all dead wrong. Everything was fine. Remember Jim Cramer saying "don't be silly on Bear Stearns"? He even gave a buy recommendation - and look what happened! Now guys like him are doing exactly the same thing. Nothing was mentioned last week about being cautious in the markets. In fact, there were reports that stocks 'were cheap' - and a few suggestions were given. See the resemblance? Once again only the wealthiest are only getting wealthier because they are playing the same trick in the book, and believe it or not most of them are falling for it.

What's happened in 2008 is going to happen again. Extreme volatility is going to continue to haunt the markets. Usually volatility is a good thing, of course you need some up and down swings to make money - extreme volatility on the other hand can hurt your portfolio, it simply carries a tremendous amount of risk.

Four essential indicators I'm using right now for trading equities and you should have your eye on are the VIX, the US dollar strength index, the Dow and the global markets. Right now the market crash on Monday is kind of brushed off like nothing ever happened, however the VIX is still extremely high: it doesn't add up, therefore use extreme caution when making a trade.

As of this time of writing the U.S. Dollar is gaining some its strength back, but the markets are still very wobbly. Again the core problem is the Fed. What do they know that the rest of us don't. Why haven't they raised the rates? Why do they want money pumped into the markets and not savings? So many questions that are unanswered at the moment. Whatever the case is, we haven't been in a sound trading environment since the beginning of 2000. Therefore I advise extreme caution when making a trade. If you do, keep a close eye on it and definitely don't use the 'set and forget strategy', and perhaps think about going short more than going long.

Next week after I've done some research I'm going to post a few tips and trading recommendations on the site.