June 13th, 2010

The End Is Near But Will It Fall or Fly?

Fellow blogger, Babak of Trader’s Narrative, hosted a guest post from Charles H. Dow Award winner, Wayne Whaley (CTA) of Witter & Lester which included the following fascinating chart of volatility over the past 60 years (click on image to enlarge):

Whaley’s comments and conclusion is that volatility has increased over the past two decades. Actually, according to the statistics, 8 years that has seen the most volatility occurred during the recent past 10 while 7 of the least volatile have occurred prior to 1970.

Having said that though, I couldn’t help but see that the S&P 500 Index has barely budged over the past 9 months (between September 30 and May 30); Friday’s close isn’t far from the close on May 30 and that was only 3.06% above the September 30 close. Traders make money when the market trends, whether it trends up or down; it’s just tough for trend traders to make much money when the market moves laterally.

The past nine months have seen anything but a trend and it has been frustrating trying to make some money unless you time the market perfectly. Granted, the range for the index has been around 14% between the low on September 30 and the high on April 23 but the correction since then has all but wiped out that volatility range.

I got to wondering how typical the last nine months have been. Where would the market’s nine month performance rank among the 857 similar nine-month periods since September, 1939 (the beginning of my database). What I found was that the most recent 9 month stretch ranked 119, or among bottom 14% in terms of volatility. Even though the range (from the low to the high) was right in the middle, the small change was atypical:

The scatter diagram above compares the range of change (horizontal) with the amount of change from beginning to end (vertical). The current 9 months falls inside the cone; the range has been average but the resulting change has been small. The typical result is that the the wider the range, the greater the percentage change; the market seldom makes the sort of v-shaped move as it’s done since September. As a matter of fact, the nine months ending December 31, 2009 saw a change of 27.76%; that change ranks in the top 3% of changes over past 70 years!

My take away from this is that we may be in for a larger percentage move ….. we just don’t know in which direction it will be, towards the top of the cone or the bottom. It just grows more and more unlikely that we’ll continue at the current level for much longer.

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  • Jesse

    interesting post joe. it would seem to me this makes a lot of sense because of the head and shoulders pattern. When we get to the "bottom" you will be able to post that the markets only moved a few percentage points over a few years time. There have been huge market swings over the last several months. 8 – 90% down days and 5 90% up days. This is typical in a bear market. in fact it's very typical for a right shoulder to happen on decreasing volume which is what we're seeing. The market is going to take another stab at the 200 dma today or tomorrow, but it's doing it on very low volume and in very over bought conditions which tells me we won't break through yet again. Get short at or near the 200dma 😀 happy trading to you

  • Anonymous

    interesting 9 month chart. Could you identify the 9 month ending at 12-31-09 for comparison sake? What about an instance 0<.

  • Joe

    For the 9 months ending December 31, the change was 27.76% so the lack of activity over the past 9 months is quite a dramatic reduction.

    FYI, at the end of October, the 9 month change was 40.96%, that was among the top 3% of changes over past 70 years! Wish I had seen these when writing the post and I would have included this interesting fact.

  • Anonymous

    To the bear above- the market is not in a bear market. We've gotten more than a 20% up move from the bottom; this signals a bull market. Since then we've not had a 20% down move to indicate a bear condition; it's mearly called a correction. Next move is above 1110. This shows an inverted H&S pattern from the spring of 2008 to the present. The chart pattern is moving up from the bottom left to the upper right since Mar 2008. Get on with it JEsse.

  • Babak

    Hi Joe, I'm glad you found the post interesting enough to use as a springboard for more research. Blog etiquette would suggest a link back to the original article.

  • Joe


    You are absolutely correct and it's something I usually do. Sorry for the oversight on my part; it's been fixed.

  • Jesse

    you guys are right. the 200dma broke, so I guess new bull market.

  • Anonymous

    Buy, buy, buy!!! SP500, DJ30 and trans indicies all a moment ago gave renewed BUY signals. Market is going up to 1295.