Study: what happens next when the stock market is very volatile


The stock market’s volatility is very high right now. And by “volatility”, we’re not referring to VIX. We’re referring to the S&P 500’s daily % movements.
The stock market’s high volatility right now is not rare. There were a lot of historical periods with high volatility. What’s rare is that the stock market’s high volatility right now was preceded by a period of extremely low volatility (i.e. 2017 – January 2018).
Here’s today’s study: what happens next when:

  1. This is the first time in 1 year (252 trading days) in which….
  2. The S&P closed up or down at least 1% vs yesterday’s CLOSE….
  3. For 21 or more trading days out of the past 42 trading days (2 months).

Here are the historical cases

  1. March 26, 2018 (current case)
  2. January 25, 2016
  3. August 29, 2011
  4. September 4, 2007
  5. March 7, 2000
  6. December 15, 1997
  7. September 27, 1990
  8. October 27, 1987
  9. November 15, 1982
  10. April 7, 1980
  11. July 11, 1973
  12. June 4, 1970
  13. June 15, 1962

Let’s look at these historical cases in detail.
*We are eliminating all the cases that occurred near a recession because the economy is nowhere near a recession today. U.S. economic growth is solid. The next recession is at least 1 year (12 months) away. The economy and stock market move in the same direction over the medium-long term.

January 25, 2016

The S&P went down over the next 3 weeks. The next 6%+ “small correction” began 5 months later in June.

August 29, 2011

The S&P went down over the next month. The next 6%+ “small correction” began 7 months later in April 2012.

March 7, 2000

The S&P swung sideways over the next week. Then it rallied for 2 more weeks before the bull market topped on March 24.

December 15, 1997

The S&P went down over the next 3 weeks. There was no “small correction” before the next “significant correction”. The next “significant correction” began 7 months later in July 1998.

September 27, 1990

The S&P went down over the next 2 weeks. The next 6%+ “small correction” began 6 months later in April 1991.

October 27, 1987

The S&P swung sideways over the next 1.5 months. Then it continued to rally fiercely until October 1989.

Conclusion

We can draw two conclusions from this study.

  1. The stock market’s volatility isn’t over. It’ll either swing sideways or swing downwards in a very choppy manner for the next few weeks (probably 2-3 weeks).
  2. The stock market’s next 6%+ “small correction” is months away. This supports another study, which suggests that the S&P 500 will make another 6%+ “small correction” in the second half of 2018.

14 comments add yours

  1. Hi Troy,
    Based on this post, if it is going to swing sideways for another several weeks, plus another 6+% correction in the 2nd half of 2018, and there is limited time left (1-2 years?) in this bull market, does it seems the Reward:risk ratio decreased?

    • Hi Alex,
      The medium term risk:reward ratio is bullish (i.e. from now until the next 6%+ “small correction”).
      Regards,
      Troy

  2. Troy, can you write an article on how to:
    – Tame your emotions? I find it difficult with the recent volatility. Am on leverage, wild swings both ways.
    – If attempt to catch bottoms (e.g. $FB), how do you suggest going about that? What strategies can I implement?
    Thank you!

  3. Hi Troy! Thank you for your valuable insight. Can you please recommend a good brokerage site that allows for daily trading? I’ve been told that some sites have settlements transactions that take days to process. Should I look into applying for a margin account? From my research on investopedia, Etrade looks promising.
    All the best,
    Vlad

    • Hi Vlad,
      I believe all brokers have a settlement period (I think it’s 2-3 days) for cash accounts. That’s why you need a margin account. I think this is an exchange rule that applies to all brokers.
      Depends on your size. If your position sizes are big, then I would go with Tradestation (I think it’s $8 a trade). Tradestation is a flat rate.
      If your position size is small, I would go with IB. I think IB is $1 per 100 shares.
      Basically it just boils down to which broker is cheaper. I do like IB’s trading platform though. Tradestation’s platform seems a bit old.
      Regards,
      Troy

  4. I am new to stock trading and I feel like I walked into a shit storm. Thank you for sharing your analysis and educated optimism. Down with the bears!

    • Haha Davant you just made my day. That is the most honest assessment I’ve heard all day.
      Regards,
      Troy

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