June 13th, 2010
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.