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Has The Wild Volatility Accomplished Anything?

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    December 21, 2014

    Remember back in the Sept/October period when I periodically tallied the volatility of the Dow’s triple-digit days? At one point I noted there had been 21 triple-digit closes by the Dow in the previous 28 trading days. Ten had been to the upside, 11 to the downside.

    In one two-day period I noted the Dow closed up 274 points, and then down 334 points the next day, a swing of 608 points. In another three-day period the swing was 496 points.

    My point was that big one to three day moves in either direction are quite meaningless, that it’s all about the direction of the trend.

    November was just the opposite in terms of volatility, unusually benign. There was only one triple-digit close by the Dow in the entire month, and it just barely made it, at exactly 100 points.

    Now December has seen a return of volatility.

    In the last 11 trading days the Dow has experienced triple-digit closes on 7 days. Five were to the downside, two to the upside. The triple digit moves on the 7 days totaled 1,609 points.

    Did they affect the trend or were they just meaningless self-cancelling noise? 1,609 points in triple-digit moves?  The Dow was at 17,958 on Dec. 7, and closed at 17,804 yesterday, a difference of 154 points, or 0.8%.

    But that is not to say that nothing was accomplished.

    The market was extremely overbought above 50-day moving averages and investor sentiment was at an extreme of bullishness, which had us expecting a 4 to 5% pullback to alleviate those two conditions.

    Investor sentiment has been losing some of its enthusiasm all month, and with last week’s ‘worst week in years’, by Wednesday of this week AAII bullishness had dropped to just 38%. The VIX Index, aka The  Fear Index, had spiked up into its fear zone.


    And the major market indexes were no longer short-term overbought above 50-day m.a.’s.


    Volatility continued and we had two of the seven triple-digit moves back to the upside, 288 points Wednesday and 421 on Thursday, before calming down to just 26 points yesterday.

    That upside volatility has investor sentiment lifting from its gloom of the previous week, the VIX already backed down some from its spike of fear.


    And it has some market indexes already back significantly above 50-day m.a.’s


    But not all.


    So outside of temporarily alleviating the short-term overbought condition and cooling off investor euphoria, did the 5% pullback accomplish anything?

    So far, the answer is that it did. At least based on the VIX, investor bullishness and euphoria remains cooled off.

    And more importantly, on the intermediate-term trend, the short-term pullback and recovery so far confirms that the bull market remains intact.

    Our intermediate-term indicators have been on a buy signal since October, and we expected only a 4 to 5% pullback before the upside resumes.

    The next chart does not show those indicators, but does show the basic premise. The S&P 500 has been in the usually bullish upper half of intermediate-term Bollinger Bands since October. But it had reached the upper limit of the bands, which often results in a brief pullback to retest the support at the 20-week m.a. (around which the bands are calculated) before the upside resumes. And so far anyway, that retest of support was successful.


    So, yes, much was potentially accomplished by the pullback and recovery.

    But does it indicate the volatility has ended, that any triple-digit moves from here will be to the upside.

    No, not at all, for a number of reasons. The market does not move in a straight line in either direction. And there are more than enough potential catalysts out there to result in continuing panic moves in both directions, as they appear to either worsen or improve on alternate days or weeks. You know the list. It includes the price of oil, the economic and currency problems in Russia, the economies of Japan and China, inflation or deflation, the housing sector in the U.S., the timetable for the Fed’s decision to begin raising interest rates, and so on.

    You could even throw in short-term market patterns. The week before the quarter’s quadruple-witching expirations week tends to be negative, and this time it was the ‘worst week in years’. The week of the expirations, which this week was, tends to be positive, and this week certainly was. If that pattern continues, the week after a positive expirations week tends to be negative.

    But then at this time of year you also have the tendency for the market to be positive in the last half of December to year end.

    Summing up, wild day-to-day volatility tells us nothing. But expected pullbacks from overbought conditions that find support at expected levels, indicating a trend remains in place, may be of more significance.

    We will just continue to follow our indicators, using short-term timing only to help avoid surprises when short-term moves take place within a trend, with or without high volatility. 

    To read my weekend newspaper column click here:   What are Technical Indicators Saying About the Market- 

    Subscribers to Street Smart Report:

    In addition to the charts and analysis in the subscribers area of this blog, there is an in-depth Markets Signals Report from Wednesday and an in-depth ‘Gold, Bonds, Dollar, Inflation’ report from Thursday in your secure area of the Street Smart Report website.

    NON-SUBSCRIBERS: The U.S. market will close early on Wednesday (at 1 o’clock), and be closed all day Thursday, Christmas Day. Our subscription office will close at o’clock Wednesday and be closed Thursday and Friday, not re-opening until Monday. So if you want to subscribe please call the office (1-386-043-4081) before noon-time Wednesday

    Images: Flickr – lending memo(licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 


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