Are More Big Falls Ahead?

Justin Fox is worried about today's rally, and whether it portends future falls:

We can learn very little about the future direction of the market from which direction stocks moved in today. But we can learn a lot about the future volatility of the market from the volatility today. Today's big jump presages more big moves. Which could just as easily be down as up.

Except I look at an intraday chart of the Dow and I don't see a huge amount of volatility -- not by recent standards, anyway. The lowest tradeable point was around that 10:10 timestamp, with the Dow at 8,750; the high point so far is 9,100. That's a range of 350 points -- compared to a range of 1,000 points on Friday. In other words, volatility might be high, but it's coming down.

My point is that when the world changes over the weekend, and stocks open higher on Monday morning and stay there, that's not volatility: that's just a rational response to new information. Volatility is what we saw on Friday, when there was no news and stocks whipsawed all over the place.

Of course, there's still downside risk. I was disappointed by the lack of specificity in Neel Kashkari's speech this morning; if Paulson fails to change his scorpion-like nature, there's a real risk that the world's capital will simply move en masse from the US to the much safer government-guaranteed shores of Europe. On the other hand, John Hempton points out that if you're a client of a broker-dealer, you're much better off in the US than in the UK. But at this point I think it's inconceivable that Paulson will let any household name fail, not between now and January, when his successor takes over.

And over the course of the coming recession, there's no knowing the degree to which stocks could grind lower. No one has any confidence in GDP forecasts any more, we'll just have to wait and see what happens to corporate profits.

But I do have some hope that the big 700-point down days are behind us. Big drops happen in bull markets; big rallies, like today's, are much more common in bear markets. That doesn't help much in terms of overall direction, but it does mean that the worst of the chaos might be over.