Panic-crash sentiment causes extreme volatility
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November 21st, 2008 by Prieur du Plessis, Investment Postcards from Cape TownTwitter It!
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) 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, a 90% up-day, and relative outperformance by the financial sector.
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Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
Tags: Bear Market, Chart, Dollar, Financial Sector, Japan, Markets, Outperformance, risk, S&P 500, Trading, US DollarPosted in Markets, US Stocks |
