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What Volatility? Trading Range is Historically Narrow

Posts by Ian Wyatt

Worried that the market is too volatile right now? The past seven trading sessions prior to today suggest otherwise.

Since August 7, the S&P 500 has traded within the same 0.35% range. According to the website SentimenTrader.com, only twice in the past 15 years has the benchmark index’s range been that narrow for seven straight trading days. In fact, it’s among the tightest seven-day trading ranges since 1928.

Such instances are rare, but have commonly occurred after periods of tremendous gains in the market.

The same was true this time. In the two months prior to August 7, S&P stocks returned 9.6%, reaching its highest level since May 2008.

Low volatility is likely a breath of fresh air to investors who have grown weary of the market’s seesaw nature. But narrow trading ranges like this typically don’t last long.

The good news is that, in recent years, what followed the narrow trading periods was usually another round of gains.

The last seven times such an extended period of low volatility occurred – again, according to SentimenTrader.com – the S&P has actually pushed even higher over the ensuing three months. In fact, the index has gained an average of 8% in the seven times this has happened since 1968.

Should we expect a similar move after this period of low volatility? Probably not. Again, the index is already at a four-year high – and not far from an all-time high.

That said, stocks broke out of their narrow range to the high side today. The S&P was up 0.7% today.

So the holding pattern is over. We’ll see if the next three months are as fruitful as they were the last few times the volatility spell was broken.