Has anyone else noticed that the market is a bit bouncy lately? Perhaps "bouncy" is not the most erudite economic expression of my life, but it's descriptive. I remember, way back in the day, when swings of 100 or 200 points in the
All this bouncing nags me with a question: are analysts crazy? How do they manage to value stocks through the roof one day, through the floor the next, and then fly back up to the roof the day after? I have no answer. Analysis, however, I do have.
I recently downloaded the daily close for the
If it's a comfort to anyone, the Great Depression still takes first prize in volatility both in terms of quantity and duration.[3] We also see that the financial scare of the late 80's briefly produced volatility on par with the present. As a further comfort, we see that the
The second figure (center) brings a bit more granularity to our present condition. As of 5/29, the 30 day trailing standard deviation for change in the
So, after a bit of analysis, do I have some idea how to tell when things will calm down? Well, not yet. A comparison would be helpful. The final figure (bottom) shows the bouncy Great Depression, and then some. The volatility of the Great Depression was, well, very volatile. Looking from left to right, you can see that prices got really bouncy really fast and then dropped precipitously for a brief time. Prices then gradually became bouncier until they were almost as bouncy as they had been at their peak. After a tumultuous period, prices finally settled down around the beginning of 1934 and remained stable for over three years. And then World War II broke out. Another story.
What does this tell us about today? Well, our current drop in bounce might signal the beginning of a new, stable financial period. Or—perhaps more likely given its rather precipitous drop—something will slap the ball and make it fly right back up for a while just as it did in the great depression. There's a rally after the bottom of every bear market, and following every post-bear rally, there is a volatile period of price settling as the market digests all of that activity.[5]
When the trailing 100 day SD has remained between 1% and 1.5% for several months, I'll say the crisis has run out of steam. I can't forecast the future, but I at least have a somewhat rigorous way to recognize the present.
[1] This was hard. Lots and lots of coding. I'm kinda proud that it worked so well.
[2] Summary stats for the
[3] Summary stats for the
[4] And, assuming a normal distribution, I have about a 68% chance of being right, for those of you who care.
[5] See this piece by the senior editor of Money Magazine.
4 comments:
I have no idea what just happened in that post...lots of math.
And graphs!
Holy cow...
I think this speaks to the degree to which markets are becoming increasingly homogenized, and concentrated into the financial industry since that is where all the trouble began in the first place. Its a little alarming that so much of the global economy as its eggs in one basket--finance. Its a shame that securities traders and other financiers don't unionize--if they did, we might see more stability out of this crisis.
I've been reading some recent books about the transformation of the global economy, and one interesting commonality between the 20s and the 00s was the volatility in global markets which led to the abandonment of the gold standard (which Nixon did in the 70s) and how speculation was able to both make people a lot of money but at the same time created a lot volatility in financial markets. Anyway, its interesting to see how the economy is less chaotic than people think.
I think it probably is fair to say that financial markets are quite chaotic in terms of their predictability. The interesting thing is that the path of this chaos can be plotted using a single variable--the DJI. Thanks for this and your other comment (I'm glad Wittgenstein came through in my thinking. He and I get along.)
Brandy linked your blog on her Twitter feed recently. I have no clue what you're talking about with the statistical models. Always appreciated the statisticians when I worked for a pharmaceutical firm. Listened to them describe their methods during study reviews. Wondered at their ability to validate their computer procedures. Wondered how any non-statistician in the audience could ask them an intelligent question. Glad I wasn't a statistician.
Maybe you could comment on how worried I should be by this graph of the S&P 500 earnings.
Being math deficient, I have been paying more attention to some of the human aspects of the current financial crisis and past crises. Something they say Paul Krugman, a true numbers man, is not prone to do when discussing the market.
Some people suggest that much of the market volatility during the Great Depression was due to FDR's practice of personally manipulating the market on a daily basis. Things calmed down some when the financial sector was more secure about what the government's rules would be. What do you think?
I liked what you said in a previous post about the abstract nature of current financial instruments. I saved a couple of links months ago about how some of these instruments first came to be used, if you're interested. Actually, a lot of modern life, including things as simple as setting up a corporation, reduce accountability and eventually lead to degradation of systems. "Big" sometimes becomes a problem, whether we are talking about civilizations or corporations.
This book helped me to understand the world a lot better. Especially government bureaucracies, even though that's not the focus of the book. It's dated now. Some of the corporations described as examples for us all have slid into decline. Predictably, according to the book. Advice from the author: Never buy stock in a company which is building a fancy new office building instead of more production capacity.
Another factor I have heard mentioned with regard to the current crisis is the relative youth of the whiz-bang traders who came to predominate on Wall Street as older traders were pushed aside because their more cautious trades were not as profitable. In the short term. But over-confidence played a role in previous crises, as well. According to what I've read.
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