Putting market volatility into perspective

Buckle up for a roller coaster ride and keep an eye out for bargains on the way.

By TheStreet Staff Jun 21, 2013 2:23PM

thestreet logoImage Source Black, GettyBy Jonathan Heller


It looks like we are in the midst of our annual market roller coaster ride, the kind that brings investors great angst, and when happening at this time of year, can put a crimp in that otherwise relaxing vacation. As a value investor I try not to pay a whole lot of attention to daily market moves, which is difficult at times because it's all anyone is talking about.


I am however, fascinated by market history, and believe it is important to review what has happened in the past from time to time because we are soon to forget. 


Last year, it was the 10% pullback in the S&P 500 ($INX) between April 2 and June 4 that seemed to indicate we might have a very bumpy summer. It seems like ages ago now but at the time the European financial crisis was in full swing, we were just months away from an election and the employment numbers were horrible. Of course, it turned out to be a pretty good summer for the markets, and between the beginning of June, and Labor Day, the S&P 500 rose 10%. The worries were real, but the market said otherwise.

 

s&p1

Two years ago, between July 22 and Aug. 22, after a relatively calm 2011 up to that point, it looked a bit like 2008/2009 all over again. During those 22 trading days, the S&P 500 fell 16.5%. One of the simple ways that I judge volatility is in terms of daily movements in the S&P 500 closing price that are in excess of 1% either up or down. During the aforementioned period, the Index rose or fell at least 1% 10 times or nearly half of the trading days. What's more, during six of those days, the daily gain or loss was greater than 4%, including four consecutive days between Aug. 8 and Aug. 11. It looked, yet again, like the wheels were coming off but by the following February the S&P had regained all that was lost and more.

 

s&p2

But even that period pales in comparison to what happened during the fourth quarter of 2008. I am so fascinated by this period, that I've memorized the statistics. Of the 64 trading days during the quarter, the S&P 500 closed plus or minus 1% 50 days, or 78% of the time. Remarkably, there were 16 days that the index had daily moves of 5% or more. Between Nov. 19 and Nov. 24, there were four consecutive days that the index moved at least 6%.


To fully put the fourth quarter of 2008 into perspective, consider that between 1950 and 2007, a 57 year period, the S&P 500 experienced a total of 19 occurrences of daily moves in excess of 5%; we experienced 16 during a single quarter.


But the unprecedented volatility did not end there. During the first half of 2009, the S&P 500 had another 72 days that it rose or fell at least 1%. If you include the fourth quarter of 2008, of the 188 trading days over three quarters, there were 122 days of plus or minus 1% moves, or nearly two of every three days.

 

s&p3

Now, back to the present. In June, the S&P 500 has moved plus or minus 1% on six occasions in 14 trading days, and is down about 4% since Wednesday. That's child's play, so far anyway. I don't pretend to know what's coming next. There are many who believe "this time it's' different" because the Fed is signaling that it will be cutting off the funny money in the near future, and that the markets will suffer further. We'll see. The market has a mind of its own, and the shores are littered with well thought out market prognostications which didn't come true. That's one reason I don't try to predict the near-term direction of the market.


I am buckling up, however, for the ride, whatever it might be, and keeping a little powder in case Mr. Market provides a bargain or two.

 

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2Comments
Jun 21, 2013 2:49PM
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This might be one of the most Naive Articles I have ever seen. Sure, it's literally impossible to predict any exact date of markets rising and falling. That hardly means you put on the Blinders and think everything is just fine. We are not in Normal times. When was the last time the FEDS accumulated this much on their balance sheets. AKA for the Bank of Japan. I only recall the FED lowering or raising rates, not actually buying huge amounts of Debt. The Euro-Zone is a new phenom while we all know China's shadow banking systems is about to implode.

With all these new thing of never before, how any investor can just sit back and say it's a great buying opportunity defies reason. Can they be right, certainly. However in this time of the New Normal, caution above all else should be the order of the day. You can still lose everything you ever worked for in the Stock Markets. It seem far too many folks want you to forget that.

Jun 22, 2013 11:12AM
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The real US monetary supply M1+M2+Mn  has shrunk by $20 trillion in the last 5 years in spite of the FED's lousy $4 trillion balance sheet.  People, borrowers and consumers, will never run up the debt levels we saw before the Boomers started  retiring for at least a whole generation. So kiss expansion of automobiles, housing, PC and other large ticket items goodbye.  Retirement will force more and more people to live smaller and reduce spending until the FED jacks rates back to 5% in 5 years or more. This isn't going to be like 2011, 2012 or anything else in the history books.
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