Fear…Greed…Fear…Greed…Fear…Greed. The wild swings the stock market has shown over the past few days is nothing short of astonishing. In the last 5 trading sessions, the Dow Jones Industrial Average has gone either up or down over 230 points on average! In the same brief time period, the S&P 500 has fluctuated over 14% when measuring intraday highs and lows. Unfortunately for the short-term investor, the general direction has been down, with markets losing about 16% from the highs at the end of April.

Are these wild swings bad for the future of stocks? No one knows for sure, but it is worthwhile to look at what such extreme movement has meant in the past.

The scatter chart below graphs out periods in the past 50+ years that there has been an intraday spread of over 10% in the S&P 500 over a five day period, and it has been a down market. This occurred in 1962, 1987, 1998, 2002 and twice in 2008. The horizontal axis shows the amount of the spread, and the vertical axis shows the gain 3 months out. So for example, the dot to the far left shows the severe stock market crash of October 1987. There was a 28.5% spread between the highs and lows over five days. Three months later, the S&P 500 was up 12%. It should be noted, however, two out of the six times, the stock market was lower three months out.

Click for Excel file

The next chart is even more interesting. It shows the same six periods of extreme volatility, but graphs the returns 1 year out. In all cases, returns were positive. In four out of the six episodes, returns were greater than 20%!

Click for Excel file

So while there are no guarantees, a purely technical analysis shows that just because there is acute volatility in a negative direction, it does not mean the end of the world for investors. I would not be surprised at all to see a 20% correction from the highs of last April, since the market had gained over 100% in just over 2 years. Though I am bracing for continued volatility before this all gets sorted out, I do believe we are in a bottoming process. For the long-term investor, this is likely to be a good time to get in the right stocks at the right price.

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