This is a subject that we wrote about in the July 31st, 2020, issue. Cumulative Advance-Decline Volume Breadth (CVB) is determined by 1) calculating the daily difference between volume on advancing issues minus volume on declining issues, and then 2) keeping a running sum of that daily total. We pointed out that there have been a few times in the past where this CVB made a new all-time high while $SPX had yet to do so. Every time, $SPX followed along to a new high of its own.
$SPX In Election Years
We have $SPX data going back to 1950, so it wasn’t too difficult to construct the following Table, which shows the performance of the market (as measured by $SPX) each election year, from the last trading day in July through the day prior to Election Day. It should be noted that the stock market was closed on Election Day until 1984 – a rare bit of trivia probably not known by most younger traders.
There are currently a number of factors affecting the CBOE’s Volatility Index ($VIX), most notably the upcoming Presidential Election and the fears of market volatility that a contested election might foist upon the stock market. But there is another element that is affecting $VIX, and it is not getting much press. Specifically, it is the after-effect of an initial bear market “shock” on $VIX.
This year has been a wild and crazy year in many respects – probably nowhere more than in volatility. That has manifested itself in the trading of $VIX. Over the years, we have sometimes described the seasonality of $VIX. As it turns out, it often follows a very similar pattern (although not completely this year). Moreover, in election years, the pattern is altered in a way that is, perhaps, developing this year as well.
Every so often, we take a look at cumulative breadth and volume, when they appear to have something to “say.” This could be one of those times, as cumulative volume has already made a new all-time high (in “stocks only” terms) as has cumulative breadth.
First, some definitions and nomenclature:
Cumulative breadth (CB): the running daily total of advances minus declines.
In the November 1929 - April 1930 rally, stocks rose 48% and volatility (all that we have to go on from that time period, of course, is realized/historic volatility) dropped from 112% to 8%!! Then we all know what happened after that: the wheels came off, and the market made new lows by October 1930, and the rout was on.
We are currently, in March 2020, in one of the three most volatile markets in history. In terms of absolute price change, it has no peers. In terms of percentage price change, 1929, 1931-1933, and 1987 are all in the mix (but not 2008, which has been surpassed). If we looked back even farther, there would be other markets which were volatile, too (1907, for example), but in this paper we are not looking back past 1928.
We first wrote about this indicator in the August 10, 2012, issue (tos2115.pdf, if you’re looking for the file name in the back issues). Excerpting from that article:
Since we are at the inception of a new year and a new decade (if you adhere to the notion that the decade begins with 2020 and not 2021), it is sometimes useful to see how the patterns of previous years have played out. The top chart on the right is a composite of all years ending in ‘9.” The orange line shows how the “average” of all stock market years has performed. The Blue line depicts the performance only of years ending in ‘9,’ and you can see that it is strong. Typically there is a decline early in the year (January-February) and then it’s off to the races for the remainder of the year – with minor corrections in May-June and September-October. The year that just concluded (2019) didn’t fit that pattern exactly, but it was certainly a very bullish year (Compare the chart in Figure 1 on Page 1).
John Bollinger has done a lot of work discussing the ramifications of the width of Bollinger Bands. In short, if the Bands are too close together (too compressed), then volatility is “too low,” and the market is due for an explosive move – probably to the downside. Conversely, if the Bands are quite far apart, then volatility has gotten “too large” and a contraction in volatility – and probably a stock market rally – is at hand.
