Rhody Trader

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After sitting through the volatility of the last few sessions, it’s worth taking some time to see where we are in the greater scheme of things - specifically, why it is that while we might see a rally or consolidation and reduction in volatility over the short-term, the longer-term view is bearish and volatility could get even higher.

Consider volatility. We’ll look at Normalized Average True Range (N-ATR) to allow for a historical comparisson of period ranges. Early in 2007 the monthly N-ATR reading bottomed out at about 4%, meaning the average monthly range was about 4% of it’s average price. That was very near to the lows put in back in late 1993 and early 1994. As of February of this year, N-ATR had reached almost 6%. That’s a long, long way away from the 2002/2003 peak level (11%), but it’s only taken about a year for that rise up from 4%. By comparisson, it took about 3.5 years to accomplish the same thing following the ‘93-’94 low.

To provide some historical perspective on that, since 1981 the N-ATR has made a 2% increase in 12 months or less on only four occassions. It happened in 1982 on the rally that kicked off in August of that year. It happened again in 1987 on the Crash, of course. The third time was in 1998 during the Asian crises and whatnot. The last was in 2002 running into the market bottom.

Shortening up the timeframe to the weekly chart, at the start of 2007 the N-ATR was just below 1.7%, the lowest level it had reached since at least the 1990s. As of the end of last week, the reading is now a bit above 4%. That’s about a third of the way into the 1999-2002 range for N-ATR. The peak in 2002 was just above 6.2%, so again we have a fair way to go before reaching that kind of extreme level.

It is interesting to note that as of Tuesday the daily timeframe N-ATR has reached almost to the peak level seen at the end of January. That’s by far the highest level in the last couple of years, so it’s definitely worth looking for an easying back of volatility some time soon. This level of N-ATR was held for a couple of weeks in Jan/Feb, so we shouldn’t necessarily expect an immediate narrowing of daily ranges, but the chances do seem good to expect a retrenchment in volatility in the not-too-distant future.

The conclusion to all this is the following. While we may see a bounce of some kind, perhaps just a consolidation of some kind, in the near term, we should be very cautious about calling a bottom here. The VIX dropped 10 points from peak to trough between Monday and Tuesday, meaning a lot of fear came out of the market. That seems a bit too rapid under the circumstances. The weekly chart view is clearly bearish and we know that bear market rallies are just as sharp as the sell-offs. That strongly suggests we haven’t yet seen the bottom and that more volatility and downside action can be expected in the weeks to come.

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