Ian Woodward's Investing Blog

It’s Very Clear our Volatility is Here to Stay!

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With apologies to George Gershwin  and an old favorite tune many moons ago which Gene Kelly danced with Leslie Caron on the banks of the Seine, I’m afraid our Volatility is here to stay forever and a day!  Times have changed and we will need to get used to seeing 300 to 600 point swings a day as commonplace on the DOW, 50 to 80 on the Nasdaq and 25 to 40 on the S&P 500.  Likewise, 20% knee jerk moves within a few days both up and down should also be expected to be commonplace.   It will be a while before this volatility subsides. 

The following is a spreadsheet of the nine other Bear Market occasions where the “Swing Down” has been greater than 20%, followed by a Rally Up and then a re-test of the Lows .  The picture below is worth a thousand words and confirms the expected odds:

stats

I have shown the % Gain/(Loss) and the calendar days for each step down, up and down again.   As you can see on the left hand side, the average and median numbers are so close to each other that the probabilities of these numbers occurring are high.  On the right hand side, the days are all over the place, but if you look at them carefully they fall into two camps, short and long term. 

Another point to notice is that the re-test is invariably less than the Rally Up, which suggests that we have probably found a bottom, unless there is some other major global surprise that raises its ugly head.  The Bounce Play occurred in two days flat and the re-test started on October 14, 2008.  It is now a month since that high, so we are on track to seeking a bottom soon.

The above statistics are for the S&P 500.  Note I am using 17% down based on the above for the re-test of the Lows; anything worse than that suggests 2002 like numbers of >-20%:

The Key Lines in the Sand to the Downside are:

table

We can see that we are just 6 points away from being 17% down on the Nasdaq, and no more than one day’s worth for the DOW and S&P 500.  As we can see, the DOW has behaved the strongest in this past month with the Nasdaq the weakest.  It has been 29 days since the re-test started and as one can see from the table, three of the readings are 33 or 34 days for previous re-tests, so we are on track!   We must hope that this will not end up with another crater to the downside, and that we will see no worse than a Double Bottom for now before we head back up. 

The $64 question is “Are we close to the end of the gloom and doom or do we head down further with more misery in store before this market can recover into a Bear Market Rally?”

The market started to drive up last week where two Eureka’s accompanied by Kahuna’s showed some signs of recovery underway.  Once that trend upwards was broken to the downside as we witnessed these past three days, the whole process must start again, so we must look for a Reversal Day as the first step in the recovery process.  We first look to Capitulation with a Spike in New Lows which is currently at 324, but could get as high as >1000, then look for a Reversal Day, and a Follow Through Day thereafter.  The short answer is to take it a day at a time for the moment as the market is still too jittery to give a clear indication of the start of a bear market rally.

Best Regards, Ian.

6 Responses to “It’s Very Clear our Volatility is Here to Stay!”

  1. Mike Orlyk Says:

    Ian – I am trying to understand your statement “seeing 300 to 600 point swings a day as commonplace on the DOW, 50 to 80 on the Nasdaq and 25 to 40 on the S&P 500” in context with the remainder of the blog. Are you saying to expect such swings until a bear rally finally manifests itself?

    Also, within the past swing down/rally up/re-test shown in your spread sheet was the volatility, at least on a percentage wise basis, equivalent to what we are seeing today?

    Thanks,

    Mike

  2. Pat McSweeney Says:

    Thanks Ian. Another outstanding road map.

  3. Paul R Says:

    Ian,

    Quite a good discussion, thanks!

    Paul

  4. Hal P. Says:

    Ian, huge market swings being the norm frankly scares me as a just a regular guy on the street.

  5. ian Says:

    To All: Thanks for the feedback; I’m glad you liked that snippet which is a taste of the rest of the story in the Newsletter to come.

    To Mike: I am saying that the Days of Wine and Roses regarding Volatility are long since gone and we will not calm down for a long while to come. I doubt if the wild swings will change when we start a Bear Market Rally. It is far more likely that it won’t calm down until we see a NEW BULL MARKET Rally, which to my mind is at least 6 to 9 months or even a year away.

    The only Measuring Rods I can offer to answer your other question is to take you back in time to May through July 2006, when we first noticed a string of six Eurekas in a row which we ultimately found in hindsight was due to excessive volatility and no fault of the Eureka Indicator. So far we have had three, so you can immediately see a similar pattern. The second Yardstick I can offer you was in the March Seminar where I showed a chart of a Day in the Life of a Day Trader and at that time the swings were 150 points a day. It goes without saying that was chicken feed to what we have now where the Volatility had increased four times at the time of the precipitous drop we had a month ago. It is half that now in terms of daily swings, but at the next sign of a crisis we can experience going back to 600 to 1000 points a day or two days at most.

    So what has caused all of this…I think I mentioned at least two items, one of which is the rage in playing double and now triple ETF’s and the other is the “No Uptick” rule for shorting. The third is the natural jiteery market conditions due to Uncertainty.

    I’m sure the pundits of 1987 can wax eloquently on volatility on the crash, but I was still working for a living back then and was not into such esoteric items when my 401K took a dive that set me back a couple of years at least in one week flat. I’ll show you a couple of charts in a blog that will bring your question and my answer to the front!

    Best Regards, Ian.

  6. Hal P. Says:

    Well, Ian. I just took a look at what the dow did today and “wild swing” just about describes it. Guess it’s a good market for short day traders. Seems rather artificial and more and more like a shell game.

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