{"id":66865,"date":"2015-01-21T05:03:28","date_gmt":"2015-01-21T10:03:28","guid":{"rendered":"http:\/\/countingpips.com\/?p=66865"},"modified":"2015-01-21T07:28:11","modified_gmt":"2015-01-21T12:28:11","slug":"stock-market-volatility-sends-2007-like-warning","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/01\/stock-market-volatility-sends-2007-like-warning\/","title":{"rendered":"Stock Market Volatility Sends 2007-Like Warning"},"content":{"rendered":"
January 21, 2015<\/div>
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By WallStreetDaily.com<\/span><\/a> \"Realized<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

The Seattle Seahawks\u2019 come-from-behind, overtime victory over the Green Bay Packers in last Sunday\u2019s NFC Championship Game was one for the ages.<\/p>\n

The implausible comeback featured an abundance of memorable moments: a fake field goal, an onside kick recovery, a Hail Mary two-point conversion, a late field goal to force overtime, questionable play calling, visibly injured players gutting it out, and a winning touchdown to a receiver whose five previous targets had resulted in four interceptions.<\/p>\n

Without a doubt, the ups and downs in this game sent fans\u2019 blood pressures spiking across the nation.<\/p>\n

Of course, erratic swings are also a fixture of the financial markets.<\/p>

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And as I warned would happen, the stock market\u2019s volatility has increased in the past few months.<\/p>\n

In fact, the volatility we\u2019ve experienced in the S&P 500 Index is sending a warning signal that the market is about to have a heart attack\u2026<\/p>\n

Volatility Measures<\/h2>\n

The popular CBOE Volatility Index<\/strong> (VIX<\/a>) is the options market\u2019s primary gauge of equity market volatility. But it measures implied<\/em> volatility, or expected future short-term volatility.<\/p>\n

Instead, I want to examine realized<\/em> volatility.<\/p>\n

One percent-plus moves on a closing basis, up or down, may get news headline attention, but I want to include intraday volatility, as well.<\/p>\n

For example, on January 13, the S&P 500 was up as much as 1.4% in the morning, but then faded into the afternoon and closed down -0.3%.<\/p>\n

This bearish price action is what\u2019s known as a reversal and is an underappreciated type of volatility.<\/p>\n

The true range is a metric that basically measures the distance between the highest and lowest points during a specified time frame. Thus, the true range indicator can effectively capture intraday or intraweek volatility.<\/p>\n

When we take an average of the true range for a trailing period, we arrive at the average true range (ATR). Traders use ATR to assess risk in their positions, but ATR is also a powerful tool that can seemingly predict the future.<\/p>\n

The chart below shows the weekly true range averaged over a rolling three-month period for the S&P 500:<\/p>\n

\"S&P<\/p>\n

Think of this chart as the market\u2019s cardiogram.<\/p>\n

Based on this measure, the past few months have seen realized volatility rise to the highest level in nearly three years, indicating heightened stress and uncertainty.<\/p>\n

Obviously, disruptive market events such as the credit crisis in 2008-2009 and the European sovereign debt crisis in 2011 are going to be accompanied by tons of volatility.<\/p>\n

But when volatility rises at a time when the S&P 500 is near all-time highs, as is currently the case, we should take notice and stay alert.<\/p>\n

Consider this analogy: When we\u2019re watching a thrilling sporting event or exercising, our heart rate naturally rises. However, if our heart starts to race during a leisurely activity, then we should take that as a signal of underlying stress.<\/p>\n

You\u2019ll notice that the last time realized volatility rose significantly as the market made all-time highs was around October 2007, right when the bear market commenced.<\/p>\n

I would categorize rising realized volatility as the second major sign that the stock market is forming an important peak, which is a process. The first was a widening of credit spreads<\/a> for corporate bonds, which continues.<\/p>\n

Oh, and gold seems to be getting a bit of a safe-haven bid, which we saw in 2011 amid the extreme volatility. The precious metal is up nearly 10% this year, showing resilience despite the strength in the U.S. dollar and broader commodity weakness.<\/p>\n

Stay cautious, my friends.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

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The post Stock Market Volatility Sends 2007-Like Warning<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Alan Gula, Chief Income Analyst The Seattle Seahawks\u2019 come-from-behind, overtime victory over the Green Bay Packers in last Sunday\u2019s NFC Championship Game was one for the ages. The implausible comeback featured an abundance of memorable moments: a fake field goal, an onside kick recovery, a Hail Mary two-point conversion, a late field […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-66865","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/66865","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=66865"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/66865\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=66865"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=66865"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=66865"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}