Putting This Volatility Into Perspective

 | Aug 12, 2011 | 11:45 AM EDT
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Up until last week, volatility during 2011, as measured by my extremely simple and non-technical method (I can already hear Tim Collins, Bob Byrne and a few others chuckling at my methodology), trading days when the S&P 500 closed plus or minus 1% or more were not as prevalent as they were in the previous three years. In fact, year to date in 2011, there have been 39 such days, well below the number achieved in 2010 (54), 2009 (85) and 2008 (64), through Aug. 10 of each year.

Of course, what's most remarkable about 2011 is that in four of the past five trading days, the S&P 500 has finished plus or minus 4% or more. This is the reason for the heart palpitations many investors have been experiencing.

Up until Aug 4, we had experienced only four trading days in 2011 when the S&P moved plus or minus at least 2%. Then all of a sudden, volatility returned with a vengeance.

But how quickly we have forgotten 2008, perhaps the most volatile year we've ever experienced. During that year's fourth quarter alone, the S&P 500 closed plus or minus at least 1% or more on 50 out of the 64 trading days, or four out of every five sessions. Putting the icing on the cake, we experienced 16 days when the index moved plus or minus 5%, a remarkable feat considering that in the 57-year period between 1950 and 1957, there were 19 such moves.

I hate to say it, but compared with 2008, this is nothing. It looks a bit like the week of Sept. 15, 2008, when we had consecutive trading days of -4.7% (Sept. 15), +1.75% (Sept. 16), -4.7% (Sept. 17), +4.3% (Sept. 18) and +4% (Sept. 19). Granted, there were no -6.7% days like this past Monday, but that was not the end of the run.

Take a look at the end of September 2008 and the following month. When TARP was rejected on Sept. 29, 2008, the S&P fell 8.8%, and the following day, it gained back 5.4%. During October's 23 trading days, the S&P finished the day plus or minus at least 1% all but three days. There were 13 days when the index finished plus or minus at least 3%, six days when the index closed plus or minus 5%, and two days when the index closed up more than 10% (Oct. 13, +11.6% and Oct. 28, +10.8%). But the total damage done that month was fierce, and the S&P 500 ended the month down 17%.

October 2008 was a very different time, no doubt. But there is now a confluence of factors that don't rule out the possibility that volatility, again, measured by my admittedly sophomoric method, will continue. Europe seems like a minefield, our own economy is sputtering at best, we can't seem to figure out how put people back to work, and Washington, D.C., is a mess. And those are the factors we already know about; they leave little room for any additional negative surprises.

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