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Why we saw a strong uptick in volatility as US markets fell

Russ Koesterich, CFA of BlackRock

With US volatility on the upswing, take a look at Asia (Part 2 of 5)

(Continued from Part 1)

Last week, stocks suffered their worst one-day slide in six months while volatility reached the highest level since last spring.

However, as I write my latest weekly investment commentary, investors need to look outside the United States for opportunities. In particular, Asian stocks — both developed and emerging (EEM) — are intriguing, and have outperformed thanks in part to less challenged valuations.

Market Realist – Volatility (VXX) is on the upswing in 2014. It rose sharply last week as the S&P 500 (IVV)(SPY) plummeted 2.69% to end at 1,925.0, led by the energy (XLE) and telecom sectors. According to data from Bloomberg, more than 7.9 billion shares traded on U.S. exchanges on July 31, 2014, making it the highest-ever level since June 27, 2014.

The Chicago Board Options Exchange Volatility Index (or VIX) rose by a steep 27% on July 31, 2014, to 16.95 and ended the week at 17.05 levels. The markets have experienced a long expanse of relative calm since 1995, and market volatility is on the rise again. The graph above shows the increase in volatility in the last few months.

Market analysts are expecting this trend to extend to the future as well. According to estimates by Bloomberg, the S&P 500 has recorded changes of more than 1% three times in the last two weeks alone. Compared with the last 62 days through July 16, 2014, where the S&P 500’s daily percentage change never exceeded 1%, this seems to be a steep increase. The data points to a further impending increase in volatility.

Read on to the next part of this series to find out how the U.S. is regaining economic strength and its impact on the stock markets.

Continue to Part 3

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