What To Expect When You’re Expecting Volatility
Volatility thrives in uncertainty and historically, it proliferates in bear markets. We examine the volatility conditions of Bitcoin, S&P 500, and Nasdaq for insights into today's market environment.
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Word Of The Day: Volatility
Are you prepared for increased volatility? It’s common for markets to only get more volatile as we go deeper into bear markets. As uncertainty, illiquidity and impatience grow, more market participants start to hope for market extremes: either that the market has bottomed and a new bull cycle is one Federal Reserve pivot away or that the limit down, margin call liquidation day will happen imminently because of a Credit Suisse collapse. Everyone hangs on the edge with each major market move to give them some sort of signal. Price ranges start to widen and some (would-be) weekly or monthly moves are condensed into just a single day of action.
Even arguably one of the best investors of all time, Stanley Druckenmiller, finds today to be one of the hardest environments to figure out:
“I have been doing this for 45 years and between the pandemic, the war and the crazy policy response in the U.S. and worldwide, this is the hardest environment I have ever encountered to try and have any confidence in a forecast six to twelve months ahead.”
For most, it’s best to sit out the action and have a large risk-off position, ready to deploy after markets have stabilized or calmed down.
Bitcoin is now following the latest 5.52% S&P 500 (SPX) rally from a new 3,586 local low. As with most bear market rallies so far, the latest rally has been swift in just a matter of days making more of the market uncertain about its next direction. It looks like anything but a “healthy” market move. We still maintain our view that new lows are likely still to be made and that we’ve yet to reach a final conclusion to the cycle for equities, risk assets and bitcoin.
We will remind readers of the magnitude of bear market rallies that we’ve seen so far and the magnitude of these rallies in 2000 and 2008 analogues. There are other cycles to study and compare but these are just a few recent examples.
We’ve already seen a significant 17.41% rally from lows for the SPX with bitcoin running to $25,000. Yet, that didn’t change its next reversion lower and, what we think, is the medium-term downside trajectory playing out still. Even in the last-stage collapses of 2002 and 2009, the S&P 500 saw rallies over 20% before going lower. As the market piles in, overshorting bloody conditions and doomsday news on higher leverage, remember that there’s no free lunch.
Even taking a more historical view back to 1970, we see more extreme periods of realized volatility and larger swings in 1-day changes playing out during bear market or recession-like conditions. The Nasdaq’s largest 1-day rallies in history have nearly all come in bear markets and are well over 7% moves.