Category Archives: Volatility

The S&P 500’s Bear Market Rallies

Stock Market Chaos!

Bear markets have notorious reputations for stock price volatility, where big daily changes in stock prices are a characteristic that distinguishes bear markets from bull markets.

These periods include bear market rallies, which often see outsized upward movements in stock prices that punctuate periods of corrections or bear markets and often extend into the early phases of recoveries from them.

That's relevant today because we've just seen two such rallies in the last two weeks, one on Wednesday, 26 December 2018 and Friday, 4 January 2018, where the S&P 500 (Index: SPX) rallied by an outsized amount with respect to its typical level of volatility.

What is an outsized amount for the stock market to go up in a single day? Building on our statistical analysis to quantify daily market volatility for the S&P 500 since 3 January 1950, we can put the threshold for identifying an outsized upward movement in its level at a 2.92% increase above its previous day's closing value, which is three standard deviations above the mean daily change of 0.034% for the index, where the variation in the percentage change is well-described by a normal distribution.

S&P 500 Daily Volatility (Percent Change Between Closing Value and Previous Trading Day's Closing Value), 3 January 1950 - 4 January 2019

For the 17,364 daily observations we have covering the 69 years from 3 January 1950 through 4 January 2019, we count a total of 115 days where stock prices closed more than 2.92% above their previous days close, accounting for 0.66%, or roughly 1 in 151, of the total observations.

These outsized rallies are not evenly distributed throughout the period however. Going year by year, here's are the main periods where they are concentrated, which cover 100 of the 115 outsized single day rallies:

  • 1955: 2 between 6 June 1955 and 6 July 1955.
  • 1962: 3 between 29 May 1962 and 24 October 1962.
  • 1974-1975: 8 between 12 July 1974 and 27 January 1975.
  • 1982: 5 between 17 August 1982 and 30 November 1982.
  • 1987: 3 between 20 October 1987 and 29 October 1987.
  • 1990-1991: 3 between 27 August 1990 and 21 August 1991.
  • 1997: 2 between 2 September 1997 and 28 October 1997.
  • 1998: 5 between 1 September 1998 and 15 October 1998.
  • 2000-2003: 25 between 16 March 2000 and 17 March 2003.
  • 2008-2009: 29 between 11 March 2008 and 15 July 2009.
  • 2010: 5 between 10 May 2010 and 1 September 2010.
  • 2011: 8 between 9 August 2011 and 20 December 2011.
  • 2018-2019: 2 between 26 December 2018 and 4 January 2019 (at this writing).

Aside from 1955, all of these periods where the S&P 500 experienced single day price gains of 2.92% or more have coincided with or closely followed negative corrections or bear markets for the S&P 500.

References

Yahoo! Finance. S&P 500 (^GSPC) Historical Prices, 3 January 1950 through 4 January 2019. [Online Database]. Accessed 4 January 2018.

Yardeni Research. Stock Market Briefing: S&P 500 Bull & Bear Market Tables. [PDF Document]. 13 February 2018.

The S&P 500’s Bear Market Rallies

Stock Market Chaos!

Bear markets have notorious reputations for stock price volatility, where big daily changes in stock prices are a characteristic that distinguishes bear markets from bull markets.

These periods include bear market rallies, which often see outsized upward movements in stock prices that punctuate periods of corrections or bear markets and often extend into the early phases of recoveries from them.

That's relevant today because we've just seen two such rallies in the last two weeks, one on Wednesday, 26 December 2018 and Friday, 4 January 2018, where the S&P 500 (Index: SPX) rallied by an outsized amount with respect to its typical level of volatility.

What is an outsized amount for the stock market to go up in a single day? Building on our statistical analysis to quantify daily market volatility for the S&P 500 since 3 January 1950, we can put the threshold for identifying an outsized upward movement in its level at a 2.92% increase above its previous day's closing value, which is three standard deviations above the mean daily change of 0.034% for the index, where the variation in the percentage change is well-described by a normal distribution.

S&P 500 Daily Volatility (Percent Change Between Closing Value and Previous Trading Day's Closing Value), 3 January 1950 - 4 January 2019

For the 17,364 daily observations we have covering the 69 years from 3 January 1950 through 4 January 2019, we count a total of 115 days where stock prices closed more than 2.92% above their previous days close, accounting for 0.66%, or roughly 1 in 151, of the total observations.

These outsized rallies are not evenly distributed throughout the period however. Going year by year, here's are the main periods where they are concentrated, which cover 100 of the 115 outsized single day rallies:

  • 1955: 2 between 6 June 1955 and 6 July 1955.
  • 1962: 3 between 29 May 1962 and 24 October 1962.
  • 1974-1975: 8 between 12 July 1974 and 27 January 1975.
  • 1982: 5 between 17 August 1982 and 30 November 1982.
  • 1987: 3 between 20 October 1987 and 29 October 1987.
  • 1990-1991: 3 between 27 August 1990 and 21 August 1991.
  • 1997: 2 between 2 September 1997 and 28 October 1997.
  • 1998: 5 between 1 September 1998 and 15 October 1998.
  • 2000-2003: 25 between 16 March 2000 and 17 March 2003.
  • 2008-2009: 29 between 11 March 2008 and 15 July 2009.
  • 2010: 5 between 10 May 2010 and 1 September 2010.
  • 2011: 8 between 9 August 2011 and 20 December 2011.
  • 2018-2019: 2 between 26 December 2018 and 4 January 2019 (at this writing).

Aside from 1955, all of these periods where the S&P 500 experienced single day price gains of 2.92% or more have coincided with or closely followed negative corrections or bear markets for the S&P 500.

References

Yahoo! Finance. S&P 500 (^GSPC) Historical Prices, 3 January 1950 through 4 January 2019. [Online Database]. Accessed 4 January 2018.

Yardeni Research. Stock Market Briefing: S&P 500 Bull & Bear Market Tables. [PDF Document]. 13 February 2018.

28/7/17: Risk, Uncertainty and Markets


I have warned about the asymmetric relationship between markets volatility and leverage inherent in lower volatility targeting strategies, such as risk-parity, CTAs, etc for some years now, including in 2015 posting for GoldCore (here: http://www.goldcore.com/us/gold-blog/goldcore-quarterly-review-by-dr-constantin-gurdgiev/). And recently, JPMorgan research came out with a more dire warning:

This is apt and timely, especially because volatility (implied - VIX, realized - actual bi-directional or semi-var based) and uncertainty (implied metrics and tail events frequencies) have been traveling in the opposite direction  for some time.

Which means (1) increasing (trend) uncertainty is coinciding with decreasing implied risks perceptions in the markets.

Meanwhile, markets indices are co-trending with uncertainty:
Which means (2) increasing markets valuations are underpricing uncertainty, while focusing on decreasing risk perceptions.

In other words, both barrels of the proverbial gun are now loaded, when it comes to anyone exposed to leverage.