Sunday, February 28, 2016

Week In Review (2/22 - 2/26) - Volatility Edition

Stocks posted their 2nd straight week of gains last week and the S&P 500 is now poised to finish February in positive territory after being down more than 6% at one point earlier in the month.

The powerful reversal could land February in rare company as only 8 months since 1970 have been down more than 6% and managed to ultimately finish in the green, this according to LPL.  Unfortunately, we're in a leap year so we've got one more trading day before we can record this month as a success.

With the gains made over the last two weeks, the S&P now sits down just 4.7% year-to-date.  However, the Nasdaq and Russell 2000 lag far behind with each being down more than 8% in 2016.

If you review the action of the VIX index over the last few months, you see that volatility has increased steadily over that time.  Using the VIX as your default measure is fine but we like to supplement such studies with other tools to gauge realized volatility.

One such tool we use is to measure how often the market makes large moves in any given month or timeframe.  For example, we track how often the S&P is up or down more than 1% in any given month.  We do the same for 2% moves.  The charts below tell an interesting story:

First, so far in 2016 we've had 23 days where the S&P has gained or lost more than 1%.  There were 13 in January and 10 so far in February.  While 2015 also featured two months where more than 10 days were up/down greater than 1%, they were not back-to-back.  And when we factor in that one of those months was December, we see that we've topped 10 days of 1% moves in the last three months.  This type of action and volatility is reminiscent of the stressful periods that we saw in 2009 (market bottoming after crisis), 2010 in the aftermath of the flash crash and 2011 during the European debt crisis.  In contrast to those years, 2012 and 2013 did not feature a single month with 10 or more 1% moves.  And in 2014, only October had 10 or more 1% moves.

So we've clearly stepped into a more volatile environment and when we look at the last few months relative to recent years it probably feels even more uncomfortable for some because of just how calm those markets were.  To take it one step further, January alone had 5 days where the S&P moved 2% or greater.  By contrast, 2013 only had four 2% days while 2012 and 2014 had just 6.

Another volatility measure we use, Average True Range (100 period) seen in the bottom panel, shows that we're nearing levels not seen since the 2009-2011 stress periods mentioned above.

Lastly, the ratio chart below of Gold (GLD) vs the S&P shows that some level of the fear trade has kicked in.  After 4 years of underperformance, GLD looks to have broken-out relative to the S&P and could be looking establish an uptrend of outperformance.

What's clear is that we've seen a ramp in volatility.

Have a good trading week!

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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