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Six Reasons to Love Volatility August 29, 2007
-------------------------------------------------------------------------------------------------------------------- This is an abbreviated sample of a comment posted for subscribers --------------------------------------------------------------------------------------------------------------------
Here's a caveat for anyone reading financial news - when the facts don't agree with the author, sometimes they just make stuff up.
We've had lots of opportunity to spot spotty arguments during the past couple of weeks, most recently dealing with the "low volume rally" from last week (which wasn't, in fact, low volume at all).
One of the refrains I'm now hearing frequently from bears is that the spike in volatility that we've seen over the past few weeks, after having enjoyed such a long stretch without it, means that we're heading into a new realm of greater movement - which must be bearish.
Like most of these arguments, though, I never see any facts, just postulations. So let's change that and look at the hard numbers behind the current situation and see if those opinions hold any merit.
You might recall a comment I posted in 2005 regarding the current level of volatility. At the time, volatility was very low, so the usual cadre of bears was suggesting that that, too, was a doomsday signal. It's curious to me that then they were saying that low volatility was bearish, and now they're saying that high volatility is bearish...one wonders what kind of volatility utopia we need to see in order for it to be bullish!
In that comment, I went over the past 100+ years in the Dow Jones Industrial Average, looking at the longer cycles that volatility tends to carve out. At the time, that analysis suggested that we could go another two years before historical volatility on the Dow climbed over 20%.
Oddly enough, it took almost exactly that. On August 8th of this year, for the first time in 1,077 trading days, historical volatility on the Dow jumped to a reading over 20%.
So let's go back over the history of the index and find any other time it was able to scrape together more than 1,000 days of low-volatility conditions, and what happened in the months following its move into the "bearish" higher-volatility environment.
Our first example comes from 1946:
In February of that year, the historical vol on the Dow jumped to over 20% when the index took a quick dive over a few-day period. That wasn't the end of the selling pressure, though, as stocks continued to drop for the next couple of weeks, shedding about 7% of the Dow's value. Home | Commentary | Indicators | Models | Sectors | COT | Subscribe | About Us
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