Backside of the Bear: Is Volatility Pointing to a Bottom?

Bespoke Investment Group does a remarkable job at compiling research. In particular, I was fascinated by the 70-year retrospective for 1% and 2% moves of the S&P 500 Index.

In brief, 50% of the last 90 days served up 1% price swings here in March of 2008. Yet, that number is far from uncommon.

The historical evidence provided by Bespoke demonstrates that the number of 1% days peaked at 66% of the prior 3 months back in October of 2002.  Price swings of 1% or more over the prior 90 days also hit 60% back in February of 1988 and October of 1974.

Were there other times where volatile price swings of 1% occurred in roughly 50% of the previous 90 trading days? It would appear that it also occurred in October of 1990 and August of 1982.

If I am interpreting the data correctly, the last 6 times that 1% price swings hit 50% of trading days in a rolling 90-day period were as follows:

March 2008
October 2002
October 1990
February 1988
August 1982
October 1974

The market bottom for the 2000-2002 bear was 10/02. The market bottom for the 1990 bear was 10/90. The market bottom for the 1987 bear may have occurred on the infamous October 19, 1987 Black Monday, but February 1988 was near the end of the bear's road.

Perhaps there's a pattern here. After all, the 1981-1982 bear reached a bottom in August of 1982. The 1973-1974 bear hit bottom in October 1974.

I am not suggesting that volatility will go away soon. Nor am I suggesting that the bearish environment itself has run its course.

I am suggesting, however, that the evidence seems to support that a bottom is in place; that is, the S&P 500 SDPR (SPY) is unlikely to fall much further than the 19%-20% price decline level. If it were to drop further, it would certainly buck the trend identified in the months outlined above.

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