Panic-crash sentiment causes extreme volatility

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As fear stalked global equity markets over the past few days, volatility continued unabated and the CBOE Volatility Index (VIX) again scaled the panic levels of October 10. The following chart tells the story …


For some perspective on the current stock market correction, Chart of the Day provides the graph below, illustrating all major stock market corrections (15% loss or greater) of the Dow Jones Industrial Index over the last 108 years.


Each dot on the chart represents a major correction as measured by the Dow. For example, the bear market that began in 1973 lasted 481 trading days and ended after the Dow declined by 45%.

“Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.2 years. As it stands right now, the current stock market correction (October 2007 peak to most recent low which occurred yesterday) would measure slightly below average in duration but above average in magnitude,” according to the study.

“In fact, of the 26 major stock market correction since 1900, the current stock market correction currently ranks as the fourth largest in magnitude (only the corrections beginning in 1906, 1929, and 1937 were greater) and is the most severe stock market correction of the post-World War II era.”

Investor sentiment seems to be in panic-crash mode, and the market appears severely oversold with only 1.6% of the S&P 500 stocks trading above their 200-day moving averages. (The 200-day moving average is often viewed as a crude measure of the primary trend.) It can’t get much worse than this! But oversold conditions have so far not produced more than a temporary reprieve, and rallies (which are bound to happen from time to time, and possibly around Thanksgiving) are therefore not to be trusted.

I am closely monitoring the surges in the US dollar and Japanese yen – low-yielding currencies previously used for funding risky investments – as a break of the uptrends in these two currencies will be a good indicator of the forced deleveraging selling starting to subside. Once this situation has played itself out, we should see a return to lower volatility levels and a return of confidence.

For a more lasting market turnaround to happen, I would like to see evidence of base formations on the charts, a 90% up-day, and relative outperformance by the financial sector.

Related article:

Economic woes torpedo stock markets

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3 comments to Panic-crash sentiment causes extreme volatility

  • Eric

    Bulls-eye, Prieur, with last 2 points: dollar trend as barometer of hedge fund forced selling, and financials must recover.

    Allegedly supersmart guys like Ken Heebner at Focus Fund ditched commodities in Q3 and bought financials on the way down. From the frying pan into the bonfire.

    But with Wall Street DOA is Washington now the Monumental Investment Bank feeding U.S. State Owned Enterprises?

    Or do banks just go back to doing what they used to do before Glass-Steagall repeal, and is that enough?

    Every weekend is night on a battlefield.

  • Colin

    Agree w you on watching the dollar/yen and euro/yen crosses very closely as an indicator for willingness to invest/take risk. Did these two important crosses make a higher low on friday? I hope so… would love to see them hold here

  • Frank Wordick

    1) The volatility chart was very interesting to see.
    2) It would have been good if somehow all the points on the Dow Corrections charge could have been identified. I wish I knew which recession it was that presently most closely resembles the current one. Not that I think that we are finished with the present one.
    3) History tells us that share market sectors, which take the worst clobbering on the way down, rarely, if ever, lead on the way up. Look for another sector to lead. I frankly doubt that anyone will be very interested in financials for a long time to come.
    4) If Prieur could let us know when Richard Russell says that the Lowry Selling Pressure Index subsides, that would be good, too.

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