The last few months have been difficult ones for our strategy consisting of calendar spreads because of the unusually high volatility of the market. Writing covered calls would have incurred even worse results. This week I would like to share with you just how volatile it has been compared to recent years.
How Volatile Has It Been? – The Numbers: We have had difficulty making positive returns for the past several months, and we know that high volatility is the most important reason for that unfortunate experience. So how volatile has it been? The table below lists the percentage that SPY fluctuated during each expiration month over the last 10 years (using the mid-point between the high and low price as the base).
Expiration Month Volatility - SPY
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |
| Jan | 7.7% | 7.7% | 8.1% | 4.6% | 7.5% | 5.0% | 4.3% | 4.0% | 2.2% | 13.2% | 14.5% |
| Feb | 5.9% | 8.0% | 7.0% | 5.6% | 11.5% | 3.5% | 4.3% | 3.0% | 3.0% | 10.2% | 14.9% |
| Mar | 8.5% | 10.9% | 13.3% | 8.9% | 12.4% | 5.4% | 4.2% | 3.3% | 6.8% | 9.9% | 21.1% |
| Apr | 8.3% | 15.4% | 14.2% | 6.8% | 7.4% | 5.9% | 4.4% | 3.0% | 6.6% | 6.3% | |
| May | 7.2% | 7.7% | 7.3% | 6.9% | 7.1% | 6.3% | 5.0% | 5.4% | 3.7% | 4.3% | |
| June | 5.7% | 8.8% | 9.3% | 11.7% | 10.9% | 4.7% | 2.6% | 5.6% | 2.9% | 9.5% | |
| July | 8.4% | 5.7% | 6.0% | 17.9% | 3.3% | 4.0% | 4.3% | 4.5% | 4.9% | 10.6% | |
| Aug | 2.4% | 6.1% | 6.1% | 11.9% | 4.7% | 5.0% | 2.4% | 4.9% | 12.1% | 6.3% | |
| Sept | 4.6% | 5.1% | 23.8% | 14.5% | 5.8% | 3.5% | 3.6% | 2.5% | 7.5% | 13.8% | |
| Oct | 7.4% | 12.1% | 11.5% | 14.7% | 6.5% | 3.8% | 5.6% | 4.7% | 1.9% | 39.5% | |
| Nov | 14.7% | 4.3% | 8.9% | 6.7% | 4.6% | 8.6% | 6.0% | 3.7% | 7.7% | 30.3% | |
| Dec | 7.7% | 7.3% | 5.2% | 8.1% | 4.7% | 3.5% | 2.5% | 3.6% | 8.3% | 14.0% |
Note that in the 4 years from 2004 through 2007 there was only one month when SPY fluctuated in double digits. In 1999, it only happened once. But in the last 9 months, a double-digit fluctuation has occurred 8 times. We have had 7 consecutive double-digit fluctuating months, the longest stretch over the entire 10-year period (back in 2002, it occurred for 5 consecutive months).
Even worse, the two largest fluctuations over the entire period occurred in the past 6 months, and those months had significantly greater volatility than occurred even in September 2001 when the viability of our entire economic system was seriously questioned (if you recall, there was fear that it would never again be safe to get on an airplane). The current expiration month has been almost as volatile as the 9/11 month.
It is clear that we have recently experienced some of the greatest volatility in the recent history of the stock market, and that is the one condition that our strategy cannot cope with. Just as it is inevitable that our economy will eventually recover, it is also certain that historical volatility patterns will return. When that happens, our strategy should prosper like never before.
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Terry
The market rebounded from an extreme oversold position this past week. Led by the financial sector, it was the largest gain for the major indexes since November. The Dow, S&P, Nasdaq and Russell
advanced 9.0%, 10.7%, 10.6% and 12.0%, respectively. Now market participants are pondering the sustainability of the rally.
Was it just another bear market rally? Only time will tell. "The overriding question people have is 'Is this rally it?'" said Quincy Krosby, chief investment strategist at The Hartford. "For that to happen I think we need to see more evidence of a turnaround. We still have significant problems in terms of unemployment. The problems with the banks are still there."
Yes, more evidence of a turnaround would be nice. There was a glimpse of that evidence people were seeking in the profitable reports coming out of Citigroup and J.P. Morgan as both financial institutions
stated that they were profitable during the first two months of 2009. Furthermore, beaten down bellwether GE reported a better-than-expected retail sales report. All of these factors helped to keep
the rally going as the week progressed.
"We are going to remain cautious because the slightest bit of bad news could turn this thing around,"said Joe Arnold, investment adviser at Dawson Wealth Management. "Oddly enough, the more skepticism about the duration of the rally the better it is because it's telling you there are still buyers on the side."
News on the economic front was limited this week, but the news that did come out was slightly positive or should I say better than expected in this beleaguered economic environment. February retail sales declined 0.1%, which was much better than the 0.5% decline that economists’ had predicted. Moreover, January retail sales data was revised sharply higher.
“Overall spending appears to be holding in better than expected, suggesting consumption will at least partially offset the negative tone of the broader economy” in the first quarter of the year, said Ian Lyngen of RBS Greenwich Capital in a research note.
On the technical side of things the overall market has pushed slightly into a short-term overbought state. Typically, expiration week is slightly positive so it will be interesting to see how the market reacts as the week progresses. As long as the market does not pull back sharply like it did after the February 9th high then we could witness more gains going forward. I will be watching to see if the S&P can push through the 775-780 which should act as an area of strong overhead resistance. If it can manage to push through this area over the next few weeks then we could see another nice rally in the making.
Overbought/Oversold as of March 13, 2009
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