Surprised by the big rally off the lows of the 10% stock market correction? It certainly left many investors and traders dizzy. The rollercoaster ride that we were on is very different from previous corrections. The enormous move in volatility came at such a breakneck speed that if you blinked, you may have missed it.
That stock market correction was FAST!
Let’s be clear that the move on volatility from a latent 10-12% to about 30-50% in days is not normal. In my previous blog post, I talked about the reasons for such a dramatic move (volatility products imploded). Until that condition was relieved, the market was going to be held hostage by extremely wide ranges. Volatility of that level could not hold for too long, and this past week saw a complete turnaround. By Friday, the VIX had fallen about 30% for the week.
So, while everyone watched breathlessly at the 1,000 point moves in the Dow Industrials (three and nearly four in one week!), it is the speed of such moves that left my jaw hanging open. As we’ve talked about previously, analysts have been predicting a market correction of 5-10% for months – and that typically occurs over a long period of time – weeks or even months – not a few trading days. By today’s standards, that would be an eternity. In fact, in today’s trading world, there could be two to three corrections over several weeks. Prepared for that? Probably not, so best to buckle up and put your helmet on.
Within just eleven trading days, markets pulled back 11% and recaptured 58% of that move. It is simply amazing how fast the move down and recovery occurred, but it’s something we are all going to have to get used to. The occasional shocker is something we’ll have to live with.
Remember Black Monday?
There has only been one other time in recent history when we saw a dramatic move in a very short time – and that was in 1987. The market crashed 508 points, more than 22%, on October 19, Black Monday. It took about two weeks to gain back 80% of those losses, which were blamed on program trading, portfolio insurance, high valuation and investor psychology. Strikingly, the first shot of the most recent high volatility started with a 500+ point drop on Friday, February 2.
Will volatility just go back to sleep now, as it did in 2017? Is the correction over? I’m not so sure. However, investors are still reaching for performance and yield, so with strong earnings growth and a rock-solid economy, equities are still the place to be.
Copyright: ivantagan / 123RF Stock Photo
