S&P 500 volatility as measured by daily changes of at least 1% have soared since last summer’s credit issues emerged as a critical issue, and now stands at a 70 year high. Since the bear-market turnaround in 2002, the number of significant daily market moves has gone down from 49.6% to 11.6% in 2006, and was 12.9% for the first half of 2007. Then, with the emergence of the credit uncertainty, market volatility shot up to 38.6% for the second half of 2007 and now stands at 51.9% for 2008 - a level not seen since 1938.
While the current uncertainty over credit and economic policies is at the heart of the market uncertainty, the upcoming earnings season appears poised to add to the volatility. Earning estimates are unusually wide, given how close to the quarter end we are. By now we typically see a street consensus emerge on the company level, with only a handful of outliers. However, the estimates remain wide apart, which means that there are going to be a significant number of surprises out there, which will translate into additional buying and selling pressure.