Stock market volatility looks here to stay even as UK fails to follow huge US rally

Russ Mould
27 December 2018

“The FTSE 100 is treating a 5% surge in America’s S&P 500 benchmark with a good degree of caution and it is easy to see why, even if that was the eighteenth biggest single-day gain in the US index since 1970 (a total sample of nearly 12,800 trading days),” says Russ Mould, AJ Bell Investment Director.

“Encouragingly, three of the seventeen other 5%-plus daily advances came immediately in the aftermath of the 1987 Crash, when buying did prove a good plan, and two more in March 2009 when the S&P finally hit bottom as the Great Financial Crisis began to abate.

“But history also shows eight of the 5%-plus gains came during the bear market of 2007-2009 and three more during the market downturn of 2000-2003, to suggest there is still a risk that this year’s Boxing Day bonanza could be no more than a wicked bear trap set to lure investors into more trouble.

 

Biggest gains since 1 January 1970

 

Date

Daily change in S&P 500

1

13-Oct-08

11.6%

2

28-Oct-08

10.8%

3

21-Oct-87

9.1%

4

23-Mar-09

7.1%

5

13-Nov-08

6.9%

6

24-Nov-08

6.5%

7

10-Mar-09

6.4%

8

21-Nov-08

6.3%

9

24-Jul-02

5.7%

10

30-Sep-08

5.4%

11

29-Jul-02

5.4%

12

20-Oct-87

5.3%

13

16-Dec-08

5.1%

14

28-Oct-97

5.1%

15

08-Sep-98

5.1%

16

27-May-70

5.0%

17

03-Jan-01

5.0%

18

26-Dec-18

5.0%

19

29-Oct-87

4.9%

20

20-Oct-08

4.8%

Source: Refinitiv data

“That may explain why the FTSE 100 is hardly responding at all and investors and traders alike will be looking out for a couple of further definitive signals before they decide it really is time to buy on the dips following this year’s Christmas sell-off.

“The first is a cooling of the current volatility. 

“The S&P has now risen or fallen by 1% or more from open to close on 60 trading days this year. That compares to the abnormally low 8 such movements in 2017, when markets seem drugged by the combination of record-low interest rates and the cheap money provided by Quantitative Easing (QE), but it still below the 20-year average of 79 daily gains or falls of 1% or more.

“This chart shows the number of monthly movements of 1% or more and it does seem as if markets do best when they are calm (and by implication confident) rather than flapping about from gains to losses and back again. Equally a crescendo in volatility can signal that bulls are giving up hope as they panic out – which is exactly when the smart money should be looking to step in and pick up some long-term bargains.

 
Source: Refinitiv data

“A similar pattern can be seen in the UK. The FTSE 100 has made serene progress during times of low volatility, generally lost momentum as it has picked up and confidence has ebbed and hit bottom when again panic is at its height and prices are swinging around wildly.

“If anything, volatility could still rise from here, given that 2018 is still a relatively quiet year compared to the last two decades.

“The second indicator is a technical one, based on the charts. Both the S&P 500 and the FTSE 100 are showing a series of lower peaks and lower troughs and both need to break this depressing sequence before many short-term traders or long-term investors may feel confident enough to think that buying on the dips is once more worth the risk.

 
Source: Refinitiv data

“The second indicator is a technical one, based on the charts. Both the S&P 500 and the FTSE 100 are showing a series of lower peaks and lower troughs and both need to break this depressing sequence before many short-term traders or long-term investors may feel confident enough to think that buying on the dips is once more worth the risk.

 
Source: Refinitiv data

 
Source: Refinitiv data

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