Expect a Volatile Correction Ahead

Last Thursday , I showed you how the Dow had been marching higher… and was due for an ”exhale.” We looked at four 50-day periods when the market was “only breathing in,” and the subsequent price declines that followed.

Today, let’s look at the S&P500 over the same four periods from a different perspective: volatility.

Boom & Bust subscribers heard from us on this subject in our February issue where we explained: “The important thing to understand about volatility is that it’s mean-reverting. Unlike asset prices that tend to rise over time, volatility mostly oscillates above and below an average.”

Today’s chart shows this phenomenon in action. It also provides a valuable clue to what’s ahead.

The Volatility Index (VIX) is commonly considered a ‘fear gauge,’ while the Average True Range (ATR) measures the size of the daily trading range. Correlation between the two is clear. During steady price advances the VIX and ATR go lower and bottom out. When a corrective sell-off occurs, both the VIX and ATR spike higher.

Looking ahead, expect a volatile correction with daily high-to-low swings of 20 to 40 points on the S&P500.