Indicator of the Week: Implications of a Volatile SPX

The SPX's recent spike in intraday volatility may have bearish implications

Senior Quantitative Analyst
Feb 3, 2016 at 7:30 AM
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Intraday volatility has come back recently. I measure intraday volatility as the range between the high and the low on the S&P 500 Index (SPX) as a percentage of the index. Looking at the average intraday range over the past month (21 trading days), it moved back above 2%. You can see on the chart below that since the financial crisis, there have been just a handful of moves above this level. This week I'll take a look at the historical implications of this. I'll also compare the intraday range among different indexes and sectors.


Implications: I went back to 1990 and looked at other times the intraday range on the S&P 500 moved above 2% after being below that level for at least three months. The table below summarizes how the index did moving forward after those signals. The second table shows "anytime" returns since 1990, for comparison. You can see in the very short term the implications are pretty bearish. The S&P 500 averages a loss of 0.49% and was positive just under 31% of the time in the two weeks after a signal. After that the percentage of positive returns more closely matches the market, but the average return still lags. That's an indication of a few big losses skewing the average return lower. The standard deviation of returns shows volatility has a tendency to stay elevated going forward. 


This next table shows the individual signals since 2007. The last five signals led to losses over the next two weeks. Hopefully history doesn't repeat itself, but there were no signals in about five years leading up to the signal in August 2007. That was followed by a relatively quick signal in January 2008, after which stocks of course collapsed. This time we went about four years with zero signals until last September, and then this recent relatively quick signal. Hopefully the repercussions are not similar.


Comparing Indexes: Here's a chart showing the average intraday ranges for some of the major indexes. You expect small-cap stocks to be the most volatile, so the recent signal is what you would expect. The small-cap Russell 2000 Index (RUT) has the highest range, followed by the Nasdaq Composite (COMP), then the S&P 500, and finally the Dow Jones Industrial Average (DJIA). Looking back, the spike in August 2015 was particularly interesting because the Dow had the highest range when it spiked. The Russell 2000 spike was by far the lowest and, unlike the other indexes, failed to reach its highest level over the prior year. I don't know exactly what to make of it, but I thought it was an interesting observation.


Stock Sector Ranges: I thought it would be interesting to see which sectors are most impacting the spike in intraday volatility. I did this by finding the average 21-day ranges of S&P 500 stocks in the sectors listed below. I show the 21-day intraday range for each sector, the average range since 2010, and finally I show how big the recent spike is above the average for the sector.

As you might expect, the energy sector had by far the biggest spike in intraday volatility. The average intraday range for that sector is 5.55%, which is more than double its typical range going back to 2010. At the other end of the table, financials and consumer non-cyclicals have been the most stable sectors over the past month, as measured by their intraday volatility.




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