DOWNSIDE VOLATILITY: 2017 WAS THE ANOMALY, NOT 2018

 

In terms of downside volatility—or lack thereof—2017 was clearly the anomaly. The downside volatility the equity markets have experienced thus far in 2018, while much faster than I expected, is not unusual if we look back to the 2009 long-term bottom in the S&P 500.

Since 2010 and including 2018, the S&P 500 has experienced five separate declines of 10% or greater—line chart is shown below. Each of the below declines did not hinder the Secular bull market, and I feel the odds favor the same with the recent decline. Simply said, the odds favor that the technical ingredients necessary to signal the end of the current Secular bull market were not present at the recent equity market highs.  

S&P 500 Index chart from March 2009 to 2018.

While history never repeats itself exactly, many times it rhymes. In looking at the weekly bar chart of the S&P 500 going back to mid-2009 and identifying each of the four previous 10%+ declines, I notice that each decline experienced a “Low, Rally, Retest” sequence (W pattern) that took place over a matter of weeks, not days. While there was a “Low, Rally, Retest” sequence last week, which is encouraging, it occurred over a matter of a few days. In other words, I think the odds favor that this bottoming pattern develops over a longer period. Part of this bottoming process would include consistently strong internal readings, as measured by advancing volume over declining volume and breadth thrusts, during any rally tries. Strong internal readings during further rally attempts would, in my mind, confirm that selling pressure has been exhausted and that demand is back in charge. Moreover, in a perfect world, I’d like to see the rally occur with investors still cautious, i.e., excessive optimism doesn’t come into play too quickly.

S&P 500 Weekly Log Bar Chart. Each of the bottoming patterns, highlighted by the blue circles, took place over a matter of weeks and looked like a "W".

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies.   

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written on 02.12.2018. Chart sources: Stockcharts.com. Red chart source: Barry Ritholz, Bloomberg and Yardeni Research.

Download PDF copy of article: Day Hagan Tech Talk February 13, 2018 (PDF)

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Investment advisory services offered through Day Hagan Asset Management, an SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member NYSE, SIPC). None of the entities listed here in this disclosure are affiliated.