Study: stock market volatility will rise in 2018


The U.S. stock market’s volatility in 2017 was remarkably low. The S&P did not even decline by more than 5%.
These are the historical years in which the S&P 500 didn’t fall more than 5%.

  1. 1954. Maximum decline = 4.4%. Next year’s maximum decline = 10.6%
  2. 1958. Maximum decline = 4.4%. Next year’s maximum decline = 9.2%
  3. 1961. Maximum decline = 4.4%. Next year’s maximum decline = 26.4%
  4. 1964. Maximum decline = 3.5%. Next year’s maximum decline = 9.6%
  5. 1993. Maximum decline = 5%. Next year’s maximum decline = 8.9%
  6. 1995. Maximum decline = 4.4%. Next year’s maximum decline = 7.6%

Each of these historical cases saw an increase in volatility next year. The next year always had a 6%+ “small correction“. This means the the U.S. stock market will be much more volatile in 2018 than in 2017.
Here are the charts.

1955 (after 1954, a low volatility year)

1959 (after 1958, a low volatility year)

1962 (after 1961, a low volatility year)

1965 (after 1964, a low volatility year)

1994 (after 1993, a low volatility year)

1996 (after 1995, a low volatility year)

6 comments add yours

  1. Troy, 1 thing to keep in mind is that all of this backtesting was before the non-human algos where placed into the markets. With the new age of non-human traders, markets are trading differently with overbought/oversold conditions with machines

    • Yes that’s true. These algos have pushed trends toward more and more extremes. Eg if RSI 80 was an extreme before, RSI 90 is the new 80

  2. Hi Troy, Thanks for the analysis.
    In terms of Q1, 2018 would be more like 1965 case, i.e., extreme bullish run (as of now), then a small drawdown, and V-shape rebound?

    • If I had to guess the shape of the next correction, I think
      1. 10% correction is most likely.
      2. Then v shaped bottom

  3. It beats me that you are giving data which is 50 years old to predict what will happen in 2018.
    It is all about earnings EPS – my friend

    • EPS can only tell you that the long term direction is up. It doesn’t tell you anything about the medium term.

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