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In my recent posts on the surge in market volatility I've examined the S&P 500 and the VIX over a couple of timeframes:
Dow Intraday Volatility
Now let's look at another measure of market volatility, this time with a historical perspective dating from October 1928, the month the Dow Jones Industrial Average expanded from 20 to 30 stocks. Here's a chart of the Dow with an overlay illustrating intraday volatility (intraday high divided by the low minus one).
As the chart illustrates, bear markets are generally associated with sustained increases in intraday volatility. The next chart gives a better look at the range of volatility over the approximately 20,500 market days since the Dow expansion. Here are some facts:
Here is a table of the 28 days with intraday volatility greater than 10%.
The rows in the table above are in chronological order and labeled to facilitate grouping by historic market periods: Crash of 1929, Great Depression, etc. The first column shows the rank order in the range of intraday volatility. Most noticeable is the astonishing numbers for Black Monday and the following Tuesday in the Crash of 1987.
I've also included a column showing the percent gain or loss for the day. Even though most of the 28 days occurred during bear markets, there were more up days (15) than down days (13).
The few high-volatility days occurring in bull markets — using the popular definition of a 20% gain — were all in proximity to a bear market (except the most recent?):
The Crash of 1929 and Great Depression
The peak in intraday volatility occurred with the first leg down in the Crash of 1929 and a second major spike with the fourth leg down (of which there were a total of six). Otherwise the volatility generally moved inversely with the market price through the crash and initial phase of the Great Depression. Noteworthy are two later spikes — above 10% in October 1937 and near 9% in May 1940. Both were associated with sharp price declines.
The Crash of 1987
The Crash of 1987 makes the record book in a couple of categories. The back-to-back spikes in volatility were by far the largest in the history of the Dow. And the first spike is associated with the single largest percent decline in Dow history (22.61%). It's clear that program trading played a major role in the crash, but overvaluation, illiquidity, and market psychology were additional factors.
The Financial Crisis of 2008
Intraday volatility during this historic episode (which I believe is still ongoing) is reminiscent of the Crash of 1929, at least in the number and clustering of high-volatility days. The most dramatic spike in volatility occurred during the weeks following the Lehman collapse on September 15th. The volatility subsided as the year end approached, but a smaller wave of volatility appeared at the beginning of 2009 and peaked around the March 9th bottom and the initial weeks of recovery.
What's Next?
I've created these charts over the weekend following the sudden spike in intraday volatility on Thursday, May 6th. The immediate question is where we go from here. Major spikes are often associated with major turning points, as the chart below illustrates (Click for a wide version).
Whether the volatility continues will depend on many factors — black-box trading, market psychology, market valuation and, most of all, the ability of the European Union to avoid a cascading sovereign debt crisis.
The next few weeks should prove interesting — perhaps even historic. As I post this article the pre-market futures are up dramatically on the combined efforts of the EU and the Fed to avert market panic. The initial response will probably be above average intraday volatility and a surge higher in major markets. But a final verdict will likely take weeks or even months to determine.
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