Volatility? Just Wait

12/25/2014 7:00 am EST

Focus: STOCKS

James Stack

President, Stack Financial Management

Volatility in the stock market seems to be heating up as investors go on a buying spree one day and then suddenly run for cover the next, observes Jim Stack, money manager, market historian, and editor of InvesTech Market Analyst.

In reality, investors might be surprised to learn that stock market volatility remains quite tame by historical standards.

We track volatility in several ways, including intraday (difference between high and low during the day) and interday (change from one close to the next).

The simplest way to examine interday volatility is to count the number of 1% and 2% daily moves (close-to-close) in the DJIA. Here’s what is important to note:

  • With only 32 daily moves of 1% in 2014, day-to-day volatility is running at 25% of what it was in 2008 during the last bear market.
  • Only one day in 2014 has experienced a 2% day-to-day change, compared to 109 in 2009 and 134 in 2008. In other words, literally every other day saw a 2% change during the last bear market.
  • A 1% change at today’s market level equates to 176 DJIA points and a 2% change is over 350 DJIA points.

So, in contrast to investor perception, market volatility has remained remarkably low this year, which is characteristic of an aging bull market.

However, investors need to be prepared for market volatility to dramatically increase when the next bear market starts to take hold. At these levels, near DJIA 18,000, it is going to feel like one heck of a wild ride.

Meanwhile, history tells us that Santa is actually quite reliable when it comes to delivering yearend gains. The two weeks prior to January 1 have seen positive market returns 82% of the time.

Further, the end-of-year holiday cheer has a good chance of extending through January provided that bearish warning flags remain absent. Overall, January has seen positive returns averaging 1.3% over the past 44 years.

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