Several strategists and money managers have commented recently about the historic volatility the markets have experienced over the past 30 days. Todays intra-day moves encouraged me to take a closer look at the numbers. Let’s start with todays rollercoaster ride. Pre-market this morning the S&P was down 2.5% from its close on Friday. An impressive move on its own, however what was even more astonishing was the 2.5% rally that happened between 8am-10am, then the 2% decline from 10am-2pm followed by the 2.5% rally into the close. All of this on a day where there was virtually zero economic data or earnings announcements. This is not how a healthy, efficient market works.
S&P Futures intra-day graph 12-Sep-11:
But to really gage the health of the markets we can’t just take one sample day. What we find is that looking over the past 30 days requires a double dose of dramamine (and half a bottle of tums if you’re a trader in these markets). Over this very short time frame the S&P has gone -15.74%, +9.68%, -7.21%, +9.73% and -7.69%. To put these moves into some perspective we’d have to go back 21 years to get an average annualized return of 8% on the S&P (and that’s assuming you re-invested all your dividends!). To put it another way, there were 5 occurences over the past 30 days where the S&P has moved at least what it has been annualizing over the past 25 years! Again, this is not how a healthy market acts.
Finally, from August 1st this year through today the realized volatility on the S&P has been 45! This means that on average the S&P has moved 2.8% a day for the past 30 trading days. There were even 2 days in August (the 8th and 9th) where the daily peak to trough in the S&P was more than 6%! These are historic moves. In fact, on a weekly basis, this is the third highest level of volatility over any week that we’ve seen in over 30 years (the crash in ’87 and the credit crisis in ’08 being the only higher).