A major rally this week off the lows of a 10% stock market correction were in order this past week. It certainly had many dizzy from the rollercoaster ride that we have all been on, something very different than what we saw previously. The enormous move in volatility came at such a breakneck speed that if you blinked, you may have missed it.
But let's understand the move on volatility from a latent 10-12% to about 30-50% in days is just not normal. We talked last week about the reasons for such a dramatic move (volatility products imploded), and until that condition was relieved the market was still going to be held hostage to extremely wide ranges. That level of range could not be held for too long however, and this past week saw a complete turnaround from the elevated volatility and range expansion By Friday, the VIX had fallen about 30% for the week.
So, while everyone seemed to watch breathlessly at the 1000 point moves in the Dow Industrials (three and nearly four during the week) up and down, the speed of such moves is more of a wonderment. For many months there was a cry out for a market correction, some sort of 5-10% so as to allow the markets to digest the strong gains over a long period.
Will the volatility just 'go to sleep' now as we saw in 2017? Is the correction over? I'm not so sure, but investors are still reaching for performance and yield, so with strong earnings growth and rock-solid economy it seems to fit that equities are still the place to be. We saw that to be true with the swift recovery last week.
But the market was not accommodating this crowd, and it usually disappoints every single crowd at one time or another. Previous market corrections would usually take place over several weeks, even months. By today's standards, that would be an eternity. In fact, in today's trading world there could be 2-3 corrections over several weeks. Prepared for that? Probably not, so best to buckle up and put your helmet on.
There was one time in recent history where we saw such a dramatic move in a very short time - and that was in 1987. The market crashed 508 points, more than 22% on October 19, Black Monday. It took all of about two weeks to gain back 80% of those losses, blamed by program trading, portfolio insurance, high valuation and investor psychology. Strikingly, the first shot of the most recent high volatility started with a 500+ point drop on Friday February 2.
Within just eleven trading days our markets have pulled back about 11% and recaptured about 58% of that move. It is simply amazing how fast the move down and recovery occurred, but it's something we are all going to have to get used to. Markets don't rise everyday, and the occasional shocker is something we'll have to live with.