Emotions & Headlines = Market Volatility

I recently came across an interesting study which compared market volatility thus far in 2011 to that of prior years: “…of the 191 trading days so far this year, 29% of those days have seen the DJIA move at least 1% either up or down, closing price to closing price within a single day. Additionally, 10% of the trading days so far this year have seen a movement of at least 2% in a single day. Using a proprietary weighting of single day changes in the DJIA, 2011 does not even make it to the top 10. This year’s rank of 30 likely comes as a surprise…All of this to say that although August and September were undeniably volatile, thus far 2011’s volatility is far from legendary.”* I have attached a supporting chart with the data.

Along with the volatility, we experienced a market draw-down in the third quarter which was driven by emotion and headlines, not hard economic data. And, while few prominent economists are forecasting an outright recession, rampant bearishness continues to permeate the markets. Interestingly, of five economic indicators used by Bank of America, only two are forecasting a recession probability at over 50%; both are “driven by emotion and headline versus hard economic data”.** On the other hand, market data does show that we are at extremely over-sold levels and corporate ‘insider’ selling is drying up. While it is possible that there is still more selling to happen, a lot of the supply (sellers) has/have come into the market and there is a lot of cash sitting in accounts yielding nothing - which equates to significant pent-up buying power (demand). I will let you know when this demand starts coming into the market and what offensive ‘plays’ to run.

For those who missed it, I shared the following ‘for what it’s worth’ in the market update dated September 23rd:..
The dividend yield on the S&P 500 now exceeds the yield on the 10-year Treasury notes. Sam Stovall, Chief Investment Strategist from Standard & Poor's, cites in his "Stovall's Sector Watch" from The Outlook that this doesn't happen very often. In fact, since 1953, there have only been 20 occurrences when the S&P 500 yielded more than T-Notes. He goes on to say, that the following 12 months, after this occurrence, the S&P 500 rose by an average of +20%.

*DWA October 5, 2011
**Barron’s October 3, 2011

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