Thursday, October 16, 2014

Why This Market is Moving So Fast and Far: The Explosion of Pure Volatility

How big was the volume during yesterday's decline?  Apparently large enough for even the dark pools to turn away customers!  I show about 380 million shares traded for SPY, compared with an average of 84 million from June through August of this year.  What that means is that entirely new sets of participants have been active in the marketplace, creating a complete change in market movement.

We can see that in the chart of pure volatility from late 2013 to the present.  I introduced the idea of pure volatility in an earlier post and have since refined it.  It is a measure of the amount of price movement we get for a given amount of volume traded in the ES futures contract.

What is evident from the chart is that pure volatility has gone through the roof.  We are not just getting a lot more volume; that volume is moving markets more than twice as much as they did at our market highs.  The reason for this is that the added market participation is directional in nature, so that moves find more buyers and sellers.  Think of e-Bay auctions for a very hot item whose popularity has gone viral.  The price movement would be much greater than for items that are not popular.

I will be watching volume and pure volatility closely from here, as we will need to see normalization of those numbers as part of any bottoming process.