The long and short of it: higher volatility ahead

THERE'S little doubt that short-selling and its inevitable partner, short-covering, played a major role in price movements over the past 2-3 years and continue to do so today. As markets grapple with a weakening economic outlook and central banks scrape the bottom of the monetary policy barrel to try and address this, volatility and with it, shorting and short-covering, are set to rise in the weeks ahead.

Much of the decision on whether to go short or to cover depends less on movements in Hong Kong or China and more on the Dow futures - on Friday for example, the Straits Times Index first dropped 20 points but a firm opening for Europe and a rebound in the Dow futures brought out intrday short-covering, and the index finished with only a five-point loss.

As it turned out, this decision was vindicated by Wall Street closing slightly in the black after a large loss on Thursday, both movements surely also coming through short-selling and covering.