How volatile has the market really been?

Think that recent volatility has been off the charts?

“Think again,” writes Mark Hulbert (for MarketWatch on August 17, 2011), saying even though recent volatility is not commonplace, it is not unique either.

The reason many of us have overlooked the historical parallels, he suspects, is that we tend to focus on the number of points gained or lost each day by the major averages. And, indeed, historians will be hard pressed to find many other periods since the Dow Jones Industrial Average was created in 1896 in which the Dow rose or fell by several hundred points in each of so many days in so short a time.

But if we focus on percentage changes, which of course we should, then there are quite a few historical parallels.

Volatility streaks a mark of ‘bottoming’ process

Consider, for example, the number of days this month when the Dow rose or fell by at least 1%. Of the 11 trading sessions through Monday of this week, eight turned out to satisfy this definition. It turns out that the same has occurred on more than a thousand other occasions since the Dow was created in 1896.

Of course, many of the days this month have seen daily changes well in excess of 1%. Six of them experienced changes in excess of 2%, in fact. But there have been more than 500 other occasions during the Dow’s history when the same has been true.

To be sure, last week saw four days in a row of at least 3% changes in the Dow, and that is closer to being truly unique. But, still, I count no fewer than 11 other occasions since 1896 in which the same took place.

There is a silver lining to the presence of so many historical parallels: It gives statisticians more confidence in drawing conclusions on what this much volatility means. Unfortunately, the conclusions that emerge from those parallels suggest that, at best, the market is in an extended bottoming process.

Take early May of 2010, which was the last time prior to recent sessions in which the market experienced as much volatility. That earlier period, of course, included the infamous Flash Crash, in which the Dow dropped intra-day to nearly one thousand point loss. The final low of that correction didn’t occur until two months later, in early July.

The same was true for the extraordinary volatility experienced in October and November 2008, when the credit crunch was at its height. The final low of that bear market didn’t occur until March 2009, several months later.

The historical record is mixed, of course. There are instances in which a burst of volatility did mark the final low. But they are in a minority. That’s why a safer bet is that the market will hit some sort of tradeable low in the next couple of months.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.



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