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T3’s Take 3: Contrary to Popular Belief, Volatility Is NOT Back


1) Is Volatility Really Here?

Ever since the Nasdaq shakedown last Friday, traders have been asking if volatility is back.

The Nasdaq has led the charge since the November 2016 election, but it’s suddenly stumbling as leaders like Apple (AAPL) and Alphabet (GOOGL) lose momentum.

Now, I’ve rambled endlessly about the post-election drop in market volatility, so I decided to go back to the numbers to see what’s really going on.

Last Friday, we clearly saw an expansion in range. The SPX traded in a 1.3% range, which was much higher than the year-to-date average of 0.5%.

But since last Friday, the average daily range has collapsed to back to… 0.5%.

So overall volatility hasn’t changed much.

Now, the Nasdaq’s relative weakness could be a sign of trouble under the surface, especially since many momentum names have been sagging.

However, the overall market picture hasn’t changed all that much.

We’re seeing little dips, and the bulls are buying them.

Plus, the SPX and Russell 2000 are both within striking range of their all-time highs.

And remember, the Nasdaq has earned the right to go sideways or down on profit-taking.

From the November 2016 low to last Friday’s early-morning high, the Nasdaq rose a whopping 26%, mostly in a straight line.

If you don’t believe me, just look at the chart:

2) So What Could Derail the Bull?

The lazy answer is a Black Swan event in the form of some major financial shock.

But as we wait for meteors to hit, we should be more practical.

I see two potential problems.

The first would be an actual criminal charge against President Trump, or a serious military conflict.

Aside from last Friday’s Nasdaq mess, the only memorable recent volatility shocks came from:

In all 4 cases, the volatility spikes were very short-lived, only lasting hours in some cases.

In the case of Trump, traders may start to assume that nothing is going to stick, which could be a setup for a market crisis in the event that criminal charges are actually filed, accompanied by an actual smoking gun.

3) And What’s the Other Issue?


That’s right. Time.

If you’re an active market observer, than you know that trends tend to go a lot further and a lot faster than anyone expects.

We can yap endlessly about the economy and fundamentals and valuations, but when there’s more buyers than sellers, the market goes up.

But the more time passes, the greater the odds that something bad happens… or we simply run out of gas.

According to the Financial Times, since 1926, we’ve had 9 bull markets.

That’s a tiny sample size, and there’s a huge variance in both bull market length and price performance.

But it’s what we have to work with.

The average bull market has lasted 8.9 years.

We’ll cross the 8.9 year mark early next year.

Perhaps that means we’ll soon be on borrowed time soon… but remember, no 2 bull markets are alike.

They’ve been as short as 2.5 years and as long as 15.1 years.

They’ve returnd as little as 75.6% and as much as 935.8%.

So no one really knows…

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