Uncommon Volatility

Wall Street enjoyed yesterday's wild ride so much, it decided to take another spin today.  There weren't quite as many violent crossings of the center line, but it was once again a session of vacillation, right up until the last hour of trading, when the major indices staged a convincing rally.  It wasn't quite as dramatic as yesterday's late afternoon rocket ride, but it was enough to clinch the Dow a triple digit gain for the session.

If it seems like the Dow has seen an unusual number of triple digit days recently, it has.  The index hit its all time closing high of 14,000 on July 19 and in 7 of the 10 sessions since, it has jumped or fallen more than 100 points.

Over those 10 sessions, the average absolute value change in the index was a hefty 155 points.  That trailing 10-day average hasn't been so high at any point since mid-October 2002, a week during which the world was gripped in a kind of perfect storm of uncertainty.  (In the span of 6 days, the Senate authorized the use of military force in Iraq, the D.C. snipers claimed their ninth victim, the EU decided to add 10 member nations, and hundreds were killed and injured in the Bali nightclub bombings.)

For what it's worth, that disquietingly volatile period in October 2002 was also an important inflection point for the equity markets.  It was that week that the market finally hit the bottom of its protracted post-bubble crash, and began the long climb that has seen the Dow surpass its peak bubble levels and nearly double from that October 2002 trough.

It's not particularly surprising that we find that spike in volatility at the 2002 trough, as volatility tends to increase during reversals of market trends.  The mildly grim question now is whether the current spike in volatility augurs another trend reversal.  The trend has clearly been our friend the last few years and it'd be a shame if it should decide to peter out.

We'd have to see a little more whipsawing before August 2007's volatility matches up to October 2002's, but given that we've gone this fitful without nearly as much headline assistance, we're to be forgiven at least for casting a leery eyebrow raise at tomorrow's trading session.