From the trade war to the Fed, the fourth quarter of 2018 has been full of uncertainty, which is markets’ least favorite scenario.

The US equity market posted one of the worst October numbers since the financial crisis. The Nasdaq tumbled 9% in October, marking its worst monthly drop since November 2008. Although the equity market caught some breath in November, the resumed sell-off in December has made the odds of a Santa Claus rally slim to none, especially if we take account of the possibility that some year-end tax-loss-related repositions may be exacerbating the market sell-off.

While a 10% correction in the market is not uncommon, there is one interesting aspect of the fourth-quarter market: intraday volatility. Out of 54 trading sessions so far in the current quarter, the Dow has had 16 sessions with intraday 500+ point swings since October 1.* This is roughly 2% of the current level of the Dow. We even had two sessions with 900+ point swings, October 10 and October 29. Additionally, the Dow had five consecutive sessions with 500+ point swings from December 4 to December 11. Not only does the market find it hard to establish some momentum in a rebound rally in this environment of unusually high intraday volatility, but market participants also tend to build bearish sentiment as the volatility drags on. For example, the latest AAII Investor Sentiment Survey, on December 13, showed the lowest bull-bear spread since February 11, 2016, even though the YTD 2018 S&P 500 return was basically flat then.

Our quantitative strategy started this quarter with all-cash position and went back into the market throughout the sell-off. We are currently invested and will hold a neutral position in the near future.

*Data from Bloomberg, ending on December 17, 2018