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Stock market volatility: Monday’s low S&P 500 volume explained

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Yahoo Finance Live’s Jared Blikre breaks down midday trading in the stock market.

Video Transcript

- Well, I'm glad that we got that news from Robinhood yesterday, because it really made for some excitement during what was, otherwise, a pretty boring trading day. Let's bring in Yahoo Finance's Jared Blikre for the breakdown of yesterday's market action or maybe the lack of it. Interesting stat that came from Callie Cox actually over at eToro US who noted that it was the first day since April that we saw the S&P 500 trade in only a 1% band for the entire day. Does that mean capitulation?

JARED BLIKRE: I think that's the opposite.

- Oh OK.

- Boring is good, right, in this case?

- We love boring.

JARED BLIKRE: Boring is good. I think we'll take it. Let's start the discussion with the VIX, because we're talking about the realized volatility of the S&P 500. Well, it kind of starts with implied volatility.

This is what the market thinks is going to happen, and right now, this is a three year chart of the VIX. And you can see it's a mean reverting asset here. We have these huge spikes.

This was a pandemic spike. That was reversed, but you can see there's this kind of rounded bottom. And we're definitely trending to the upside here, and we've seen a lot of these high volatility moves this year alone.

So I prepared this chart. This is going to be the S&P 500. Going back one year, now, at the bottom, I have a histogram, and this is showing the realized volatility. These little orange and red dots here, that shows the volatility of the day.

So yesterday was 0.96. It's kind of hard to see there. Today, we're about 1.17, so just a little bit above that mark. But look at what's happened in the history when we had other periods, where we were below 1% right down here. Guess what? That was this rally and then cool off up here.

But what happened? That was subsequently sold off. I don't remember if it was Powell, or inflation, or something. But something scared the market. There was a big change of opinion, more downside risk had to get priced in, and that's what we're seeing now.

So you can see now, when the tail of last year-- let's take the last five or six months going into November. We had a period of low volatility. I'm going to circle that in here. And this is kind of a unique year, because we had the all time high for the S&P 500 coincidentally on the first trading day of the year. So that's right up here.

My point is we've had these low volatility era-- not eras. I'd call them respites, because boring is kind of good in this era. We've had them before, but usually, it's simply presaging further volatility. I see no reason to think that, until we're substantially higher, and we see substantially more progress in the market.

- Now, can I ask about volume though? Because what was interesting was that Chris Murphy over at Susquehanna noted that we saw a lot of tepid volume in early June, and some of that might explain the massive movements in volatility that we've seen. Because you see spreads blow out when there are just fewer traders in the space, but we've saw an increase in volumes as of the end of last week into this week. So does that tell you anything about whether or not more traders are coming back in to actually play in this market?

JARED BLIKRE: Yeah, volume is kind of a misunderstood concept, and you hear these quotes all the time, especially when the market is at all time highs. We are rallying on no volume. Well, it's important to have volume, but the more volume you have is usually to the upside and individual names.

So if you have a stock, let's say, it's Apple. You go back 20 years, and you correlate the price movements to the upside with volume. You're going to see volume increasing for the most part on the way up.

Now, what we see in the indices is, when we have big down days, that's when we see off the chart volume, and that's just because of the electronic trading in the market. That's been a trend. That's going on for 25, 30 years. But basically, what I'm seeing in the market now is low liquidity and low volume.

We just had the Russell rebalance. That was kind of the end. That's the beginning of the summer, and that's the end of the volume, any high volume period we have, until probably earnings season. That's several weeks away or the next Fed meeting.

That's even farther away. So in these summer doldrums, it's very difficult to execute large trades, and that's why we see, when there's a dramatic repricing of risk, when we get another high CPI print, well, there's not enough liquidity to facilitate that. So we see these huge down swings in the market, and that may not be over.

- Well, that's a good point. We're coming off of a period, where we saw a fair amount of economic data. Obviously, earnings season preceding that, too, so it sounds like going back to Brian's earlier point about capitulation, we're not quite there yet. And there's more downside to come?

- Potential. We can't say for sure, but we haven't seen capitulation yet, at least, not the way I'm seeing it on the charts. You want to see it? Just go back to 2020 and look at the S&P 500 down-- what was it? --30% in just a few weeks, something like that. I don't think it has to be as extreme, but everybody's kind of looking for that all clear signal. I haven't seen it yet.