Tuesday, November 18, 2008

How Volatile Is This Stock Market?

I went to the cash S&P 500 Index from 2003 through June of 2007 and calculated that the median weekly high-low price range was 2.09% (mean 2.32%).

I then looked at the *daily* high-low range for $SPX from July, 2007 to the present and found that the median was 2.63% (mean 3.58%).

The discrepancy between the mean and median for the recent daily time period indicates that we have had a number of outlier, high-volatility days that have skewed the average upward. This skew was less pronounced during the earlier period.

Bottom line: a single day's trading range in the S&P 500 Index is at least 30% larger than a week's trading range from 2003 to mid-2007. When we consider those outlier days, we're getting an average of 50% more volatility per day than we used to get in an entire week.

That has real implications for the sizing of positions and the need for tight risk management. As we saw late this afternoon, an hour in the present market can make all the difference in terms of entries and exits.
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2 comments:

Michael said...

"a single day's trading range in the S&P 500 Index is at least 30% larger than a week's trading range from 2003 to mid-2007."

That's quite a stat! I still think that the SEC needs to bring back the program trading curbs. It seems to me that's the easiest way to calm things down. Not to mention all the things Alan Farley mentioned a couple of days ago - http://bit.ly/3K0w

ken long said...

i monitor the size and direction of the morning gap, and calculate the standard deviation of the gaps of the last 30 days. in the last 4 months the standard deviation has doubled. So we are not only seeing greater intraday ranges and intraweek ranges; the amount of system shock being delivered thru the overnight trade is quite astounding too. This has implications for shorter term traders deciding on how much overnight risk they think they are accepting