Volatility Index Increases as Market Drops Thursday

Volatility Index Increases as Market Drops Thursday

Posted on August 05, 2011

The S&P 500 was down about 4.8% yesterday, it was a tough day. Every now and then, the market will have a day that is just hard to explain. To put yesterday in prospective, according to the bell curve, yesterday's decline was a fifth standard deviation event. That means that we should experience a fifth standard deviation event 1 day out of about 1,700,000 days. There are around 250 trading days in a year. So a day like yesterday should happen once in 6,800 years. So much for using the bell curve for making market predictions.

An increase in volatility tends to precede possible large, single day, moves in the market. Not this time. Wednesday, our Canterbury Volatility Index (CVI) was at 78. A CVI below 90 is considered to be a low risk environment. We did have a short term sell signal, but about 75% of the time, a 78 CVI would be considered to be a “buy the dip” opportunity. So what about this time?

Today the CVI is 102. That may be the largest one day percentage increase, when the CVI was below 90, in the last 80 years. Typically a decline like we saw yesterday would result from a piece of shocking news or an event. That was not the case yesterday. Yesterday was a panic selloff that seemed to just build on itself. Historically, the market will see a bottom within 3 or 4 days after a day like yesterday. That said, our thermostat matrix did shift to a Bearish mode.

It is anyone's guess as to the outcome for today. Flip a coin. As it stands now, we will be looking to make adjustments in the portfolios on an oversold bounce. Yesterday was just a day. A crazy day but just another day. In the scheme of things it will soon be forgotten.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Tehnician (CMT) makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known for as an innovator, educator and been revolutionary in the advancements in portfolio and risk management.