The holiday season was especially valuable in 2018, if only because it provided a welcome oasis from the extreme volatility that hit global financial markets at the end of December.
On the half-day of trading immediately prior to Christmas Day, the Dow Jones Industrial (DJI) lost over 600 points - its worst decline in the 122-year history of the index on the trading day immediately before Christmas.
On the full day of trading immediately after Christmas Day, the Dow Jones Industrial gained over 1000 points. That’s the first time in history the DJI has ever recorded a gain above 1,000 points in a single session.
Given that type of market action, one would think some hugely impacting news development was in play - like Brexit falling off the rails, or a banking crisis in Italy, or some other destabilizing crisis which took the world by surprise.
But that wasn't the case at all. Almost nothing of consequence was announced over the 3-day span encompassing the Christmas holiday in 2018.
As if the two days of trading that book-ended the Christmas weren't enough in terms of excitement, the second full trading day after Christmas (December 27th) basically turned out to be a microcosm of the other two - equity markets sunk heavily early in the day and then staged an epic rally into the close, clawing back all of the losses and then some. The DJI was down about 2.7% at its worst point on Thursday, and ended the day 1.1% higher!
That's the type of market action which catches the attention of even passive market observers.
So how does one make sense of the current roller coaster in equity prices? That's not an easy question, and the answer also largely depends on your own unique approach to trading and your general outlook.
One method I often use to help reset my perspective, or at least to sanity-check my strategic thinking is to review the “hard data.” If you share that mindset, then a couple new shows on the tastytrade network will likely be of interest.
The first is a recent episode of Market Measures focusing on "The Year in Stock Movement." The second is a new episode of Options Jive called "2019 Ranges: Over, Under, Fair." I view the former as a good summary of the 2018 trading year, and the latter as valuable insight into broader expectations for the 2019 trading year.
On Market Measures, the hosts analyze historical data in SPY dating back to 2005 to help provide further context on 2018. As you can see in the graphic below, the average highs/lows and resulting ranges in SPY for the 2005-2017 window are very comparable to what was observed during 2018:
As you can see in the graphic above, the average range of 22.6% during the years 2005-2017 wasn't that much higher than the range observed in 2018.
The hosts also highlight on this episode the fact that implied volatility (IV) from the 2005-2017 period was on average about 3.75% higher than realized volatility (RV). In 2018, the buffer between IV and RV shrunk slightly, dropping to roughly 2.65% - meaning premium sellers enjoyed a slightly less favorable environment last year.
On the 2018 review show, the hosts also highlight some of the biggest winners and losers from both the ETF and single-stock universes in 2018, and we hope you'll take the time to review the complete episode when your schedule allows.
Shifting gears, the new installment of Options Jive takes a proactive look at forecasts for 2019, through the eyes of analysts, as well as the quantitative ranges implied by current options prices.
As you can see in the bullet points below, strategists at some of the largest financial institutions in the United States remain relatively bullish on the direction of the S&P 500 in 2019, despite recent volatility:
2019 S&P 500 Outlook
Morgan Stanley: 2,750
Bank of America: 2,900
Goldman Sachs: 3,000
However, these firms generally make their money when investors stay in the market, as opposed to fleeing from it. As such, it can be informative to review the ranges implied by current options prices for a better idea of where things might trade in 2019.
The bullet points below highlight the expected ranges for each respective underlying in 2019 based on current options prices:
S&P 500: +/- 23% in 2019
Nasdaq: +/- 26% in 2019
Treasury Bonds (TLT): +/- 13% in 2019
Gold (GLD): +/- 14% in 2019
Crude Oil (/CL): +/- 38% in 2019
As we see in the first bullet point, options prices in the S&P 500 are implying a range of +/- 23% in 2019. This suggests traders expect 2019 to be more volatile than 2018, which saw an actual range of 21.5%.
We hope you’ll take the time to review both episodes highlighted on this blog post, which may help provide you with additional insight on actual market behavior in 2018, as well as expected market behavior in 2019.
If you have any questions about 2019, don’t hesitate to leave a message in the space below, or tweet us at @tastytrade.
Thanks for reading, and best of luck in the New Year!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.