More Weakness, More Volatility

Stocks did indeed close near their lows, trending lower through most of the session. By day's end, we had expanded the number of stocks making new 20-day lows across the NYSE, NASDAQ, and ASE to over 2700 -- remarkable given yesterday's solid bounce.

I took a look at what has happened historically after we've had three consecutive days of 20-day lows exceeding 2000. Going back to late 2002, which is how long I've kept these data, we find only 39 instances of such weakness. The next trading day, the S&P 500 Index (SPY) has averaged a gain of about 1% (24 up, 15 down). I find no significant upside or downside edge after such a relief bounce.

What is particularly noteworthy is that such weakness has tended to occur during periods of heightened volatility. The standard deviation of next day returns following three days of significant weakness has been 3.63%, nearly three times the level of the remainder of the sample. Such heightened volatility was evident as far as 20 days out, doubling the level seen during other periods in the market.

That suggests that, whether or not weakness is finished, the recent levels of heightened volatility may persist into next week.

Comments

[Jasper M:]

And yet, the Vix was so low.
Complacency kills itself.

Oct 31 02:50 AM

[bob adamson:]

The stock market and investor sentiment have swung widely with the rapidly changing perceptions of economic performance over the past two years. Performance of different sectors of the market diverged significantly through 2007 and first 8 months of 2008 as their respective prospects seemed so different. All sectors save precious metals and Government securities suffered a major collapse in value during the October to March period reflecting the fear of possible economic collapse. The simple lessening of that pervasive sense of fear from March to October resulted in a dynamic relief rally but little sense of attainment or security. Recently that sense of relief has run its course and, while anxiety has not taken its place, uncertainty about the pace and shape of further recovery is assuming a more central spot in investors’ minds.

In short, we’ve been through a lot over a very short span of time. Both the economy and our expectations of it (and for the stock market) have now reached a wary equilibrium as we search for clearer indications where the economy is heading. Consequently, views are now decidedly mixed (and subject to rapid change). The best guess is that the stock market will move alternatively up and down rapidly within a narrow range over the next few weeks until the future direction of the economy becomes clearer.

Oct 31 02:58 AM

[irondoor91:]

On Oct 31 02:58 AM bob adamson wrote:

> The stock market and investor sentiment have swung widely with the
> rapidly changing perceptions of economic performance over the past
> two years. Performance of different sectors of the market diverged
> significantly through 2007 and first 8 months of 2008 as their respective
> prospects seemed so different. All sectors save precious metals and
> Government securities suffered a major collapse in value during the
> October to March period reflecting the fear of possible economic
> collapse. The simple lessening of that pervasive sense of fear from
> March to October resulted in a dynamic relief rally but little sense
> of attainment or security. Recently that sense of relief has run
> its course and, while anxiety has not taken its place, uncertainty
> about the pace and shape of further recovery is assuming a more central
> spot in investors’ minds.
>
> In short, we’ve been through a lot over a very short span of time.
> Both the economy and our expectations of it (and for the stock market)
> have now reached a wary equilibrium as we search for clearer indications
> where the economy is heading. Consequently, views are now decidedly
> mixed (and subject to rapid change). The best guess is that the stock
> market will move alternatively up and down rapidly within a narrow
> range over the next few weeks until the future direction of the economy
> becomes clearer.

Question:

What was the "future direction of the economy" in July, 2007? Here

Oct 31 07:46 AM

[Dave Wrixon:]

Two days to Meltdown Monday.

Oct 31 07:47 AM

[YoYoMama:]

Actually, the volume on this sell-off was pathetically low, a sign that this rally still has legs. Sorry, your shorts will have to wait a little longer.


On Oct 31 07:47 AM Dave Wrixon wrote:

> Two days to Meltdown Monday.

Oct 31 09:49 AM

[willynill:]

Wrong, the volume was much higher Friday than it was Thursday.


On Oct 31 09:49 AM YoYoMama wrote:

> Actually, the volume on this sell-off was pathetically low, a sign
> that this rally still has legs. Sorry, your shorts will have to wait
> a little longer.

Oct 31 12:27 PM

[bob adamson:]

Irondoor91 asks: ‘What was the "future direction of the economy" in July, 2007?’. I think that question is raised by the following part of my earlier post:
“Performance of different sectors of the market diverged significantly through 2007 and first 8 months of 2008 as their respective prospects seemed so different.”

In short, I didn’t focus on July of 2007 but on July of 2008 when the US Fed and Treasury took decisive action to reverse the USD/commodities swap trade that many hedged funds were employing; a trade that was driving up the cost of oil and driving down the value of the USD. Arguably, this marked the point where concerted monetary and fiscal efforts began to address the economic imbalances that threatened to destabilize the economy.


On Oct 31 07:46 AM irondoor91 wrote:

>

Oct 31 12:37 PM

[Dave Wrixon:]

The volume has been missing throughout this entire rally but it will kick in with a vengeance very soon, and don't be kidded into thinking that dollar weakness will save Wall Street, it won't. When it realized that money cannot be withdrawn by the Fed without either returning Mortgage backed securities making the banks insolvent or returning Treasuries making the Federal Government insolvent, it will be realized that the only way out is increases in interest rates, which cannot really happen because the Federal Government cannot afford higher interest charges. At that point it will be obvious that the entire system is not only broke but cannot be fixed.


On Oct 31 12:27 PM willynill wrote:

> Wrong, the volume was much higher Friday than it was Thursday.<br/>

Oct 31 01:49 PM

[fwi:]

The tell was the last 10 minutes of Friday's trading. If the HFTs were betting on the financials, they would have bought in size. This did not happen. Some of these financials have tripled on vapor and" extend and pretend", and as this is always a game of probabilities, the odds favor the shorts now.

Oct 31 02:11 PM

[bigbaboon57:]

The Fed can

Oct 31 02:11 PM

[bigbaboon57:]

The can't increase rates and the socialists in power are still increasing debt which would explode further with any increase in rates. All roads lead to money printing and hyperinflation. The stock market will "go up", but not in real terms. We are in the early stages of an inflationary depression, entirely engineered by socialist and anti-manufacturing forces within the US government over decades.

Oct 31 02:15 PM

[Clive Corcoran:]

The fact that volatility clusters the way it does is another indictment of the idea that asset returns follow a random walk

Oct 31 02:34 PM

[Jasper M:]

Dave: I think we are not going to see a meltdown, so much as an unrelenting death-by-inches, where markets drop, and drop, and drop, day after day, week after week, month after month, punctuated by a few short, intense rallies. That was the experience of most of the '30-'32 market.

Also, you and others here seem to believe the Fed controls rates. They don't. Rates will be going up soon, no matter what the Fed, the Treasury, or the President desire. Remember operation Twist. Similarly, the big dollar rally starting now will Not be according to their plan, and in fact will likely prove something of an embarrassment to them before it is over, years hence.

Oct 31 02:48 PM

[bigbaboon57:]

Thed Fed doesn't control long rates, and they will go up. But the Fed does control short term rates and can print an infinite amount of money, which they will do to finance the out of control federal spending. The Democrats love more federal spending and more people dependent on the federal government ... those are all locked in
Democratic voters who will never vote against yet more federal spending. None of this is constitutional (see the 10th amendment) but then the constitution has bee ignored for decades.

Oct 31 03:02 PM

[anarchist:]

Were you ranting about socialist and out of control spending when Bush was doing the spending?


On Oct 31 03:02 PM bigbaboon57 wrote:

> Thed Fed doesn't control long rates, and they will go up. But the
> Fed does control short term rates and can print an infinite amount
> of money, which they will do to finance the out of control federal
> spending. The Democrats love more federal spending and more people
> dependent on the federal government ... those are all locked in
>
> Democratic voters who will never vote against yet more federal spending.
> None of this is constitutional (see the 10th amendment) but then
> the constitution has bee ignored for decades.

Oct 31 03:50 PM

[bigbaboon57:]

Yes, I was saying the same about Bush. Bush was a horrible spender, didn't veto a single spending bill, and larded it on with a prescription drug benefit we couldn't (and can't) afford. He entered us into foreign wars and borrowed money from China to pay for it ... I don't mind the wars, but we should have TAKEN Iraqi oil to pay for liberating THEIR country. Having said that about Bush, he was an amateur spender next to Obama and the Democratic congress ... they have literally quadrupled the deficit from Bush's worst level.

Oct 31 04:16 PM

[bigbaboon57:]

Just to make it clear, I did not vote Republican last election. McCain was Obama-lite, not enough difference to matter. I only would have voted Republican in the last election if Ron Paul had actually been the nominee (no chance with the mainstream media in charge). I voted for the Constitution party ... look into it.

Oct 31 04:19 PM

[Jasper M:]

On Oct 31 03:02 PM bigbaboon57 wrote:

> Thed Fed doesn't control long rates, and they will go up. But the
> Fed does control short term rates and can print an infinite amount
> of money, which they will do to finance the out of control federal
> spending.

Not quickly, they can't - all of their 'instant' money supply levers are credit based, and a deflating economy freezes these up. That leaves only the actual, physical printing presses. And that would take DECades.
To give a current, concrete example, it is estimated the world's invetors lost $40 t-t-t-Trillion in 2008. Since then, it is estimated that various government action has replaced about $2 Trillion of that. We have reached, and passed, von Mises "saturation point", and extra credit does really nothing now.

> Democratic voters who will never vote against yet more federal spending.

Oh, I think they will, the moment 51% of them realize that it won't be reaching them.

BigBab, I share your outrage, and some of your beliefs, but I also know that things are going to get so bad, so fast, that Obama won't be electable as dogcatcher in 3 years. He will be Hoovered right out of that chair.
And then we'll be dealing with different flavored idiocy . . .

Nov 01 04:56 AM

[anarchist:]

I apologize to those who care that this is off subject.
Jasper M said: "And then we'll be dealing with different flavored idiocy . . . " Yes, exactly and this is the USs Achilles heel, the campaign process that brings us twiddle Dee and twiddle Dumb as the RNC and DNC sponsored candidates, the only candidates who haven't been marginalized by them and the press. Having said that I predict that Mr. Obama will be re-elected.
bigbaboon57: stated: "I don't mind the wars, but we should have TAKEN Iraqi oil to pay for liberating THEIR country"
I think you might have minded the war had your son or daughter came home in an aluminum box. The US still occupies Iraq and I wouldn't exactly say we liberated their country, no we, through our inept foreign policies created a situation where Iraq is now governed by the Shai's who will eventually instill Sharia law and enact physical or political genocide upon the Sunnis. In essence we replaced a dictator with a dictatorial sect.
Had the US not lied about their reasons for going into Iraq it might have been easier, as you said "just take the oil" but of course that would exposed the US for what it was under the Bush administration (or perhaps most administrations) an International bully.

Nov 01 10:35 AM

[Jasper M:]

I may have to eat my words -
It may be a bit early (c. ( PM Eastern as I write this), but the Nikkei opened WAAYYY down Monday morning. So Dave, if you're still out there listening, maybe I was wrong, and you were right. Perhaps this will resolve faster than slower.

Not that I would mind - a lot of my puts were starting to get stale.

On Oct 31 07:47 AM Dave Wrixon wrote:

> Two days to Meltdown Monday.

Nov 01 09:10 PM

[YoYoMama:]

Hmmm....here we are, Nov. 5th. and we closed again above Dow 10,000. Looks like my negative 5 comment wasn't so off the mark.

On Oct 31 09:49 AM YoYoMama wrote:

> Actually, the volume on this sell-off was pathetically low, a sign
> that this rally still has legs. Sorry, your shorts will have to
> wait a little longer.

Nov 05 04:03 PM