The Volatility Bubble -- Average Daily Change Now Above 4%!

A couple of weeks ago, we did a post showing that the 50-day average daily change of the S&P 500 was higher than at any other point in the index's history.  After yesterday's close, another record was eclipsed when the average daily change moved above +/-4%!  As shown below, this volatility blows away even the highest levels reached during the Great Depression.

Up until the start of 2008, a daily move of 4% in a 50-day period was noteworthy.  From 1945 through 2007, the S&P 500 had 49 one-day moves of 4% or more, which is an average of less than one per year.  This year we've had 28!  For a market as big as the United States to average a 4.02% daily change over a 50-day period is truly astounding.  This is the type of volatility that we see in frontier and emerging markets -- not the biggest, most developed market in the world.  The volatility bubble won't last forever, and being long it at this stage of the game is a very risky bet.

 

Comments

[Guru]

Explain why "being long it at this stage of the game is a very risky bet." I'm not sure I see volatility as a bullish indication but instead rather than a bearish one. Volatility = risk and higher risk means price weakness. Bottom line, I instead think stability = bull.

[Yossarian]

Do you have a view on whether the recent introduction of 2x and 3x index and inverse index ETFs affect volatility? One response might be, no, because they simply mimic the indices. Another might be, yes, because as their volume increases, the swings in the indices will be more dramatic.

[Greg Feirman]

This is why you guys are the best. Truly unbelievable. What are we Zimbabwe? The chart says it all.

[ss]

I believe they are saying that being long volatility is a risky bet, not equities.

Please correct me if I'm wrong.

[mb]

"The **volatility bubble** won't last forever, and being long **it**..."

re-read the sentence guru. being long volatility is a bearish position.

[Tom Chechatka]

Turning back to the late-'29 through early-'30 period, one might first conclude "being long [volatility] at this stage of the game is a very risky bet." Yet we also see how in no time at all being long volatility more or less became a sure thing...

[Frank]

Your volatility chart appears to shows a peak in volatility in 1933 following the DJIA bottom at 40.60 in 1932. If one assumes a peak in volatility has already occurred then analogously we anticipate higher prices ahead in today's market.

[Christopher]

Guru: Volatility and risk have NOTHING to do with price weakness. Risk and volatility also exist when prices are strength. Go back to Finance 101 and learn about standard deviation. Strong prices can also exhibit volatile behavior and increased risk. You're fooled if you think risk only exists in a downward trending market or when prices exhibit weakness.