The Dynamics of Stock Market Cycles

Above we can see that the volatility of stocks across market sectors has come down significantly since the February lows. Since 2012, when realized sector volatility has been in its lowest quartile, the next 20 days in SPY have averaged a loss of -.40%. When sector volatility has been in its highest quartile, the next 20 days in SPY have averaged a gain of +3.54%.

During historical investigations, I consistently find that intermediate-term returns are significantly tied to volatility and correlation regimes, particularly when the statistical overlaps among realized volatility, implied volatility, and correlation are eliminated.

The reason for this is that the psychological dynamics of market tops differ from those of market bottoms. Stocks make tops when values become sufficiently stretched to the upside that buying interest dries up. In that context, the weakest sectors begin to fall off, breadth wanes, correlations go from lower to higher, and volatility shifts from lower to higher.

Stocks make bottoms when values become sufficiently stretched to the downside that the buying interest of value participants is aroused. This creates a reversal while volatility and correlation are still high, as breadth rebounds strongly.

This interplay of the dynamics of tops and bottoms is what creates market cycles. Ultimately it is the interplay of shorter-term, momentum/trend players and longer-term value participants that creates the drying up at tops and sharp rebounds at bottoms. Tracking volatility and correlation regimes is a way of gauging, in relative terms, where we stand in intermediate-term market cycles.

Further Reading: Sector Correlations
.

Comments

Benefits Of Healthy eating Turmeric every day for the body

One teaspoon of turmeric a day to prevent inflammation, accumulation of toxins, pain, and the outbreak of cancer. Yes, turmeric has been known since 2.5 centuries ago in India, as a plant anti-inflammatory / inflammatory, anti-bacterial, and also have a good detox properties, now proven to prevent Alzheimer's disease and cancer. Turmeric prevents inflammation: For people who

Women and children overboard

It's the Catch-22 of clinical trials: to protect pregnant women and children from the risks of untested drugs....we don't test drugs adequately for them. In the last few decades , we've been more concerned about the harms of research than of inadequately tested treatments for everyone, in fact. But for "vulnerable populations," like pregnant women and children, the default was to exclude them. And just in case any women might be, or might become, pregnant, it was often easier just to exclude us all from trials. It got so bad, that by the late 1990s, the FDA realized regulations and more for pregnant women - and women generally - had to change. The NIH (National Institutes of Health) took action too. And so few drugs had enough safety and efficacy information for children that, even in official circles, children were being called "therapeutic orphans." Action began on that, too. There is still a long way to go. But this month there was a sign that

Not a word was spoken (but many were learned)

Video is often used in the EFL classroom for listening comprehension activities, facilitating discussions and, of course, language work. But how can you exploit silent films without any language in them? Since developing learners' linguistic resources should be our primary goal (well, at least the blogger behind the blog thinks so), here are four suggestions on how language (grammar and vocabulary) can be generated from silent clips. Split-viewing Split-viewing is an information gap activity where the class is split into groups with one group facing the screen and the other with their back to the screen. The ones facing the screen than report on what they have seen - this can be done WHILE as well as AFTER they watch. Alternatively, students who are not watching (the ones sitting with their backs to the screen) can be send out of the classroom and come up with a list of the questions to ask the 'watching group'. This works particularly well with action or crime scenes with

Humor4u

Search This Blog