08 August 2022
As a trader, you require a degree of volatility when looking at a particular stock or sector. Automatically, many of us assume that technology shares must be the most volatile, but are they? The timing of your trade execution is a skill, but you need to find the right sector to give yourself a chance with short-term trades.
As a trader, you require a degree of volatility when looking at a particular stock or sector. Automatically, many of us assume that technology shares must be the most volatile, but are they? The timing of your trade execution is a skill, but you need to find the right sector to give yourself a chance with short-term trades.
A recent report on the S&P Global Index, covering 31 December 2009 to 31 December 2019, cast a fascinating light on the most volatile market sectors. This period included the financial crisis and Brexit, so while maybe not a reflection of long-term volatility, there were some interesting findings.
As an execution-only trader, the energy sector has been the most volatile over the ten-year period – even before the current energy crisis. The energy sector's standard deviation, a measure of volatility, came in at a staggering 20.3%. So it is safe to say that timing is critical in this sector when looking at trade execution!
Taking in natural resources, precious metals and agricultural products, the commodity sector has been very volatile. Considering the various challenges over the last few years, the standard deviation figure of 18.6% is perhaps not surprising. But is there more volatility to come in the short term?
Even though the US mortgage crisis began just before this period, the impact has extended beyond a decade. Consequently, reporting the third highest standard deviation of 16.8% will not surprise many execution-only day traders.However, if you get your trade execution timing wrong, you could take a big hit!
Many will be surprised to learn that the technology sector was ranked the fourth most volatile sector with a standard deviation of 14.8%. Perhaps the problem is that many execution-only day traders consider relatively new start-ups as the technology sector. In reality, it takes in everything from mobile phones to televisions, companies like Google and Microsoft, and other long-established operations.
This sector includes everything from retail to consumer services, luxury goods to media and more. Considering the significant squeeze on consumer spending, many might have expected a higher standard deviation than the 14.6% registered.
This sector includes various businesses, from media and entertainment to Internet and phone services to wireless communications. The standard deviation for this sector came in at 14.1%, which may seem a little low. Then again, even during the most challenging economic times, we saw businesses and consumers increasing their focus on online services.
Numerous reports have shown that the healthcare sector is to a certain extent protected from severe economic volatility. Whether you need a hospital, physician, medical equipment or dentist, when you need them, there is no alternative. Consequently, the volatility measure of 12.4% is perhaps no surprise.
This sector takes in everything from sewage services to natural gas, water, electricity, and much more. It may be that the industry is quite heavily regulated, often limiting growth but providing secure dividend income, which has impacted the volatility. As a result, this is the lowest of the mainstream investment sectors, with just an 11.8% standard deviation.
The timing of trade execution is crucial for a day trader, but without volatility, this can severely limit potential returns. Some of the above figures are surprising, with many investorsassuming that the technology sector would be the most volatile. This may open the eyes of some execution-onlytraders who have perhaps been focusing on the wrong sectors?
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