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by D. R. Barton, Jr.

It would be difficult to imagine a more interesting and chaotic time in the financial markets.

We’re seeing market characteristics (daily ranges, reversal patterns, etc.) that are literally unprecedented. The volatility (as measured by Average True Range or ATR) of almost every major trading instrument is at all time highs. It doesn’t matter if you’re looking at stock indexes, bonds, oil, gold, currencies, etc. It seems that the only broad groups of instruments not trading at their highest volatilities ever are the smaller commodities that don’t have big hedge fund and institutional interest- things like coffee and orange juice.

This volatility expansion is significant for several reasons:

It is broad-reaching. As mentioned above, it is hitting practically every traded instrument.

It is persistent. The markets are no strangers to volatility spikes. We see them come and go when particularly juicy reasons for fear or greed enter the markets. But this volatility explosion has not subsided. Depending on how you measure “persistence”; the volatility “spike” has lasted four to six weeks, not just for a few days.

It is huge. Back in April of 2000, we made the previous volatility highs when the Internet bubble started to collapse. Then volatility (as measured by 14 day ATR) was 3.0% of price. Last Wednesday, this same ratio showed ATR at an astonishing 8.3% of price!!

As if to punctuate the truly wild nature of the recent market volatility-here is an interesting market tidbit: today is a “Fed Day” (FOMC meeting announcement) and after dropping both key rates by 50 basis points, it looks like the market will have a day within only 2/3rds of its recent range!

The market is giving us some really important information through this language of high volatility. The message is this: the uncertainty of where the markets are heading next has never been higher. With the slightest whiff of negative news, the market free falls. When even a shimmer of hope comes along (like the Fed strongly hinting that the rate cut was real yesterday, sending the markets up 10%), the markets jump through the roof.

It’s like a cat on a hot tin roof… after drinking a can of Red Bull. Every move is over exaggerated.

One of the questions that I get most often is, “when will the stock market return to some sense of normalcy?” It is hard to predict this, of course. But one key indicator will be when the volatility settles way down from its current unprecedented highs. It’s okay if the market is directional; I don’t think we’ll see a traditional basing / consolidation period from here. But what IS needed is a sense that the markets don’t jump every time someone whispers, “Boo”. And a volatility contraction will be a good (and maybe the best) indication that this is happening.

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