Meisler: We've Seen Volatility Like This Before

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I've seen so many comparisons to the 1930s as well as to the Crash of 1987 in the past week or so that I'm sure there must be some comparisons to be made. But I had this recollection that the moves we saw after the tech bubble burst in 2000 were just as wild as we have seen now. Yet no one was discussing this.

So naturally I went back and looked. In early April 2000, Nasdaq actually lost -- get this --27% in five trading days. This time around, while no consolation I'm sure, it took about seven trading days to do the same sort of damage.

Now check this out. After that slide in five days, Nasdaq rallied 20% over the next two trading days. Does this sound familiar? The next two days after that? The market was down to the tune of 12%. And then? Up 18% over the next six trading days.

I don't know about you, but boy, it looks to me as though we have seen volatility like this before, or at least something close to it. The difference is that the moves in the S&P 500 weren't as violent. But we have seen this violence before, only it was in Nasdaq. Everyone says things are more sped up now for some reason. I don't know about you, but it looked pretty sped up to me in the spring of 2000.

I've boxed off the time period discussed on the chart so you can see the wild swings for yourself. And you can see it all eventually led to a tradable rally (indicated on the chart with an arrow).

As part of this exercise, I went back and read the headlines from those days in mid-April 2000. The first thing that caught my eye was a headline from this Web site on the day following the two-day 20% rally: "Volatility Worries Return to Wall Street, Sending Indices Down."

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Then I read the article and was fascinated by this line: "And after two tech-giant disappointments and some profit-taking, Wall Street investors threw the brakes on a two-day recovery rally that led the Nasdaq composite index to its second-highest percentage gain ever and gave the Dow Jones Industrial Average some upward momentum after Friday's record 617.78-point plunge.

What do we see here? We see Nasdaq had its second highest percentage gain ever. Oh boy, how many times did we hear statistics such as that expressed after last Monday's Oct. 13 rally? Then we see the DJIA had a record 617-plus point plunge on a Friday Oct. 17. Gosh, where have we heard about 600 and 700-point plunges on the DJIA before?

In other words folks, we have seen volatility of extreme proportions before. We have seen the indices move up and down with swings that we haven't seen before. In 2000 the tech bubble was unwinding. Now the credit bubble is unwinding.

I have no idea what the proper template is for this market. Is it post-Crash 1987? I have many doubts that it is. That was a bull market phenomenon; this is clearly not. Is it post 9/11? Well, that too raises doubts. That was not a financial crisis, but rather a crisis more akin to a world war.

Is it like the spring of 2000? Well, if it is, we have a long way to go on the downside.

Or is it the 1930s? All I can say is that I truly hope it isn't because that means we still have a depression ahead of us.

I have said before I won't know when we get to the low until well after the low is behind us. I will only know in retrospect. What I do know is there are no bases left on the charts, so if we are at the low then we are only there in terms of price, not time. It will take many months before any sort of base can be built.

Therefore, I expect this market will be more about trading than investing for many months to come. And as I laid out last week, I still think we will get a low for a tradable rally sometime in the latter part of October.

For more explanation of these indicators, check out The Chartist's primer.

This was originally published on RealMoney on Oct. 20, 2008. For more information about subscribing to RealMoney, please click here.

At the time of publication, Meisler had no positions in any stocks mentioned, although holdings can change at any time.

Helene Meisler writes a daily technical analysis column and Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.

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