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An Increase in Volatility is Normal as Bull Markets Age

In some ways, bull markets are like humans – they get increasingly unstable as they age. Indeed, the S&P 500 recorded an average of 55 days of 1%+ closing volatility during the 7th year of a bull market since 1945, up from an average of 43 days in year six. What’s more, history shows that we will have even more volatility to look forward to should this bull market last an additional two years, as the S&P 500 averaged 85 and 95 days of 1%+ volatility in years eight and nine of bull markets since WWII.

The Fed’s recent rate hike didn’t help, either. In the past 50 years, the S&P 500 typically experienced a near doubling of the number of 1%+ days in the three months after the start of a rate-tightening cycle as compared with the three months before. So the outstanding question remains. Does increased volatility imply that the S&P 500 is preparing to fall into a new bear market? Even though volatility is not a bull-market timing mechanism, it does suggest that we are well beyond the end of the beginning, and may be closing in on the beginning of the end.

S&P 500 January-January Price Percent Changes During Years Associated With Lunar New Years Since 1945

P.S. If you are in the market for some good news, consider the S&P 500’s return during Lunar New Years. The lunar New Year typically starts between mid-January and mid-February. Today welcomes the Year of the Monkey (Gung Hey Fat Choy). Since 1945, the S&P 500 gained an average 7.8% during the January-to-January period associated with the Year of the Monkey, and rose in price 100% of the time.

Since so many people go ape over the Super Bowl Theory, investors may be equally intrigued by this similarly non-causational indicator that hints encouragingly that 2016 might not be so bad for stocks after all.

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