Is Increased Volatility a Sign of a Bear Market?

[ASusilovic]

So far this year the S&P 500 has had thirteen days where the index was up or down 2% in a single day (nine down and four up). This marks a large increase over prior years. In 2006 there were only two days where the index moved 2% in a single day (both up), while in 2005 and 2004 there were no days with a move of 2%. There are some who argue that the increase in volatility is a sign of a market top, implying that we may be entering a bear market. In the chart below, we illustrate the total number of days where the S&P 500 moved 2% by year. We also shaded years in which there was a bear market in gray (We defined a bear market as a 20% decline on a closing basis in the S&P 500).

In the bear markets of 1987 and 2000-2002, there was a large increase in the number of 2% days. However, for every bear market where the market showed increased volatility, there were also years where the S&P 500 saw a bear market and volatility did not show a meaningful increase (1956-1957 and 1966). Furthermore, there were also three years in the 1990s (1997-1999) where the S&P 500 had more 2% days than it did this year, and the market did not go into a bear market. So while the increased volatility can be stressful for the individual, it is not necessarily a harbinger of a bear market.

http://bespokeinvest.typepad.com/bespoke/2007/11/is-increased-vo.html

 

[a529612]

Paul Tudor Jones: "When you look at the volatility we've had in the past month in the NASDAQ for instance, every time I've seen volatility like that, I don't care what the market was, whether it was soybeans in '76 or '83 or whether it was silver at the top in 1980 or whether it was some of the biotech stocks at the top earlier in the '90's, when you get that kind of volatility you know that generally that's associated with a top."

http://chinese-school.netfirms.com/Paul-Tudor-Jones-interview.html

 

[mokwit]

"Volatility precedes a change in trend"

Soros

 

[nazzdack]

Suss----Do you have the same data for the Dow Jones going back to 1920? The magnitude of the bars seems to correlate to the magnitude of their respective bear market. The middle of bull markets tend to be calm. Volatility happens at the transition from bull to bear and vice versa as the other guy said.

 

[Hansel H]

Judy Woodruff interviewed some market pundit or other ( might have been Mike Holland ) on the PBS Newshour last week; this guy said the majority of transactions taking place on the market were between traders and that investors are on the sidelines - hence the volatility.

As you can imagine, a bunch of jittery traders aren't likely to help stabilize the markets; if anybody can precipitate a massive selloff it's a horde of nervous daytraders sitting in front of their computers ready to execute at the first sign of trouble.

Said pundit also said the markets are completely detached from fundamentals.

 

[mokwit]

If you look at a volume profile of a market that is getting volatile you will see that it is being pushed to each last known pool of liquidity as the market as a whole or big players (who can't just hit the bid) try to get out by pushing the market to places where there was liquidity and recognise that the price paid to do this is cheaper than getting stuck in a market that crashes.

 

[dtrader98]

Here's one way to look at it:

 

[flyingiguana]

i find volatility more useful to call bottoms along with other indicators.

 

[ASusilovic]

Quote from nazzdack:

Suss----Do you have the same data for the Dow Jones going back to 1920? The magnitude of the bars seems to correlate to the magnitude of their respective bear market. The middle of bull markets tend to be calm. Volatility happens at the transition from bull to bear and vice versa as the other guy said.

Nazzdack, I am more then thankful we experience this kind of Vola. Last couple of years have been boring. One way street markets...

 

[domestic]

Quote from flyingiguana:

i find volatility more useful to call bottoms along with other indicators.

according to that chart , the bottoms and the tops are clearly vix correlated. as an option trader, i do welcome the increased vol, even though it has also increased my blood pressure at times. if you can adapt, this environment is perfect for all traders. when the market was printing vix <15 , it was measurably tougher for me to make money.