Is Increased Volatility a Sign of a Bear Market?

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.

Comments

[Praveen]

Interesting chart.

If total 2% moves (up+down) days is 20 or more, it was always a bear market.