So much for that lack of volatility in equities. After the tightest 40-day range for the S&P 500 ever (based on closing prices), 43 days without a 1% move (up or down), and 51 days in a row without a 1% drop, the past three days (-2.5%, +1.5%, -1.5%) have put an end to all of those streaks. Today we will show why this recent surge in volatility could have legs.
As we noted at the start of the month, going back to 1950 September has been the worst month of the year, down 0.5% on average and lower 56% of the time. But here’s something that isn’t pointed out very often: September tends to be rather strong during the first half, but then drops off in the second half of the month. In fact, this has been more pronounced over the past 20 years, with the S&P 500 up 1.6% as of September 16, yet consistently lower the rest of the month to finish down 0.3%.
Now the big question is, will the recent volatility stick around? From a seasonality point of view, the answer is a resounding yes. There are many ways to measure volatility. One way is to look at how many days move 1% or more (up or down). Historically, since 1928 there have been 22,307 trading days and 5,394 have moved 1% or more. This comes out to 24.2% of all days. This drops to 20.3% if you start in 1950 and cut out the late 1920s and early 1930s. Still, the bottom line is that 1% moves are fairly common, even though we haven’t seen many the past two months.
To see which trading days see the most 1% moves, we looked at all years since 1950 and calculated how many times each particular trading day moved 1% or more. To smooth things out, we then calculated a five-day moving average. This all matters, as today is the 177th trading day of the year, and as the chart below shows, we see a trough in 1% moves before a big surge over the next 27 days. Historically, this time frame is September 14 until October 21. In other words, the next five weeks are the most volatile time of the year and this recent volatility could only be getting started.
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