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Dave's Daily: Volatility Falling Fast

Dave's Daily

By Dave Fry, founder and publisher of ETF Digest.

January 11, 2010



Bernie Schaeffer of Schaeffer's Investment Research in a December 28, 2009 report wrote market volatility had become comatose intraday as volatility measured by the VIX has steadily declined.   He wrote: "But, in market environment dominated by 'quants' and 'algos' and 'high frequency trading' strategies--estimated by many to account for two-thirds of trading volume on any given day--intraday volatility has all but disappeared."  He continued: "What are the implications of this major truncation of intraday volatility.  It is probably contributing to the overall pattern of declining day-to-day volatility, as price momentum from overnight moves is rarely sustained for the remainder of the session.  And, as in all situations when volatility is under tight constraint, the 'coiled spring' effect becomes a heightened possibility, as an external event (almost always negative) triggers direction-based trading such huge volumes that the 'control structure' is overwhelmed and various short-term strategies blow up, thus adding fuel to the price spike.  That said, I will note that after the initial spike on the morning of Nov. 27, I was very surprised to see the market revert to "coma behavior" for the rest of the session, despite the shock of the Dubai World collapse and the light post-Thanksgiving activity. This tells me that it would indeed take a very powerful external shock to awaken the patient from the vegetative state. And on a more practical note, you can free yourself up for other more productive activities by ignoring the market for the five or so hours each day during which it is typically comatose."


This report was written before the recent negative employment report which also failed to dent bullish markets and volatility.  So, as Schaeffer well indicated, it's going to take something serious to kill the beast. 

Could poor earnings results do this?  Perhaps.  How about an interest rate increase?  Not necessarily.  Bombing Iran?  General Patraeus noted over the weekend that bombing Iran was an option for the US and perhaps another.  Patraeus is a successful military man also possessing a PhD in International Relations from Princeton so he's not prone to careless statements.

Volume was once again light while breadth was relatively flat.

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