June 3rd, 2010
Is the stock market starting to keep you up at night? Does it feel like you’re being jerked around like a yo-yo? Are you starting to feel dizzy from the knee-jerk reactions to any and every bit of “news” …. like today’s slip-of-the-tongue, maybe-intentional leaks by the President and Vice President that Friday’s labor report will be better than most we’ve seen since the Financial Crises began.
I wanted to learn the causes of my increasing discomfort so I took a look at the daily data. The chart below is not the graph of a lie detector test. Nor is it the chart from a heart monitor. But if this were a medical TV show you’d hear someone hollering “Paddles, Paddles”. Here’s what I discovered (click on image to enlarge):
“So Doc, you’re telling me it’s not psychosomatic? I’m not crazy?” “No, you’re anxious for good reason.”
The above chart represents the absolute percentage change of the daily changes in the S&P 500 Index since the middle of the Financial Crises Crash (what isn’t showing are the intra-day changes which aggravate the fluctuations). Obviously, those of us who survived those traumatic days in September, 2008 to March, 2009 remember the wild daily fluctuations (the box in the center). You can see that it wasn’t uncommon to have swings of 6% or more from the prior days close; there were even two over 10%-swing days. I don’t know about you but there were nights when we’d leave the TV on as we slept in order to check in the middle of the night to see what the futures were and what market’s around the world might be indicating. Those were scary times.
So what’s that box on the right hand side of the graph. Since the beginning of May, the market had several swings of more than a 3% from the prior close. On May 10, the market closed up 4.4%; a change this large last occurred as a decline on April 20, 2009. [Note: In the 2 1/2 years of the Tech Bubble Crash, the market had only seven 4% swing days.]
But there is a reward to weathering the volatility. If recent history is any guide, high volatility can continue for several weeks and it seems to be a precursor and part of a fairly significant bottom-forming process. The greater the decline, the longer the process takes. If what we’re experiencing since the beginning of May is another one of those bottom-forming processes, we may not have much longer to go.
I’ve been looking for one last lunge to around 950. That may be too much or too little. What we can be more certain of is that the remainder of the ride will continue to be wild and bumpy.