This is a Very Volatile Stock Market, What Does it Mean?


Over the past 2 wks the DJIA experienced its best day since Y 1933, which came on 24 March when the index gained 11.37%, as well as its 2 worst days since the crash on October 1987, which came on 12 March and 16 March when it marked 1 day losses of -9.99% and -12.93%, respectively.

This month of March the DJIA has had 10 days which rank in the largest 1 day moves since Y 1985, as it has had 5 of its 20 best and 5 of its 20 worst 1 day returns.

To put this into perspective, since Y 2009 we have had only 2 days that ranked in the 20 best or 20 worst: 26 December 2018 when DJIA gained 4.98% and 8 August 2011 when the Index lost -5.55%.

No other month since Y 1985 has had nearly as many of the largest 1 day moves as March 2020 – October 2008 and October 1987 tie for 2nd which each month owning 5. While the number of large moves this month has been unprecedented in recent history.

The Big Q: What does this mean to an average investor, and what good does it do knowing that the most extreme days are clustered and that, historically, you have been better off if you missed both the best and the worst of them?

The Big A: The most volatile frames have usually come in down markets. Ok then “What is a down market?” Some have quantified it using moving averages, but another way to quantify it is using the NYSE Bullish Percent (BPNYSE).  The BPNYSE is an indicator that Nasdaq Dorsey Wright tracks which measures the percent of stocks within the NYSE universe that are trading on Point and Figure Buy signals. 

The 30%, and below, level has been looked as the “green zone” on the BPNYSE, and we have historically seen some of the best buying opportunities come from below the 30% level; however, trips to these levels are often uncomfortable.  The way to quantify the “uncomfortable” nature of the markets while the BPNYSE is at or below 30% is simply by looking at the standard deviation or volatility of the market.

For starters, going back to February 1997 the BPNYSE has only spent about 4.5% of the time at 30% or below while 77% of the days the BPNYSE has been between 30% and 70%.  While the bulk of the past 23+ years has been spent between 30% and 70%, a large portion of the volatility has come while below the 30% mark. 

When the BPNYSE is between 30% and 70% the standard deviation of the S&P 500 has been 17.28%, while the BPNYSE has been below 30% the standard deviation has been 51.80%, or more than 3X greater.

The idea that the BPNYSE being below 30% is a highly volatile state for the market, but also offers some of the best buying opportunities may seem somewhat counterintuitive.

But, as the adage goes “The time to buy is when there’s blood in streets” and blood in the streets means panic, which means volatility. Of course, it is best if are not 1 of those bleeding on the Street,

Volatility is significantly lower when the BPNYSE is above 30 and as many of you are undoubtedly already aware, the BP crossed back above the 30 threshold on Friday.

Does this mean that the market volatility is over, likely not. The volatility statistics I have cited are averages. And while the S&P 500 Volatility Index (VIX) has come down from the historically high levels it recently marked, it currently sits just below 61, a highly elevated mark.

The level of the VIX gives us an expected level of annualized volatility based on SPX option activity and at 61 implies daily volatility of about 3.84%. And quite often we have seen the BPNYSE reverse up and down several times before bottoming. 

Maybe we will see this again, maybe not.

So, while the last few market days have been some of the best single days the market has produced and have been a welcome change, given the current level of the VIX, the historical behavior of the BPNYSE, and that these extreme days, good and bad, tend to come together, it would not be at all surprising if we continue to see large moves in the short-term.

I am watching the QQQ closely, as it is leading in here.

Have a healthy day, Stay home!

#bearish#Bullish#DIA#fear#market#QQQ#SPX#SPY DJIA#stock#VIX#volatile#VXX