I penned this in my 2022 outlook on the markets, "In conclusion, the data points to a mixed bag and has something for everyone. The bears can highlight tapering and volatility while the bulls can point to continued momentum. Our best guess is the first half will be more volatile than normal with multiple pullbacks." So far 2022 has started off in a high volatile one way market down. Yet, is the current sell off still within the normal distribution curve for pullbacks? The current correction has already eclipsed the minor 5% intra-year drop from last year. But it still remains well within the normal average. According to JP Morgan the average intra-year drop for the S&P 500 is 14%.
I think the big difference this year is the volatility of the market that have produced wild swings in both directions. A tweet from Ryan Detrick sums this up.
A recent Bloomberg article highlighted the recent action was very reminiscent of prior volatile bear markets.
By Lu Wang
(Bloomberg) -- That was some ride U.S. stocks just took.
The Nasdaq 100, along with the rest of the market, turned
on a dime in the middle of its worst selloff in two years and
vaulted back into the green, erasing a loss of nearly 5%. The
move was the latest in a series of heart-stopping turnarounds
that have dogged markets amid rising tensions around Federal
Reserve policy.
Days like Monday are not unprecedented. But when they’ve
come, it’s been at times that are not remembered fondly by
equity bulls. Today’s move was the biggest of its kind since
Jan. 8, 2001, in the middle of the come-down from the dot-com
bubble. Most of the other similar moves occurred in the three
years that crash took to play out, with a few others coming in
the heart of the 2008 financial crisis.
The table below shows the past instances where the Nasdaq
100 erased an intraday decline of bigger than 4%.
Date |Intraday Loss |Close
1/24/2022| -4.94| 0.49
11/13/2008| -4.76| 6.48
10/23/2008| -4.84| 0.17
10/16/2008| -4.18| 5.52
7/15/2002| -4.55| 2.02
6/26/2002| -4.19| 0.44
6/14/2002| -4.61| 0.28
10/12/2001| -4.04| 0.29
2/23/2001| -4.78| 1.16
1/8/2001| -5.15| 0.6
10/26/2000| -4.87| 1.92
8/3/2000| -4.25| 3.82
Lastly, a great blog from Dr. Brett Steenbarger shows why the current environment has been so difficult for some many traders. His last paragraph sums it up perfectly.
"We're due for a bounce" is not a substitute for a rational assessment of markets and their possible outcomes. No amount of trading psychology techniques can substitute for knowing what you're doing when you put capital at risk. People who tout their "passion for trading" most often need to trade and that leads them to take undue risk. Far better to have a passion for good bets. If you know that broadly oversold markets move a lot on average, the smart bet is to shorten your time frame, reduce the volatility of your returns, and find short-term bets that pay well without a scary downside.
The character of the market has certainly changed over the last few months and has been exasperated since the start of the year. It remains in a high volatility regime as the market gets more oversold. When the dust settles and the selling is exhausted there will be an abundance of opportunities on the upside. Trying to time it is almost impossible and why I remain very cautious in this tape as I expect volatility to remain elevated and a choppy trading environment. I am prepared for all scenarios and continue to adjust as new information arrives.
