Q: I don’t completely understand volatility. Dr. Tharp had a %ATR chart in a recent newsletter. Can you detail how he calculates the %ATR for a specific market?
A: Van compares today’s S&P 500 daily ATR% (20 day period) to the mean of the S&P 500 ATR%’s for all days in about the last 40 years. The ATR% is the ATR divided by the closing price. Today’s ATR% distance away from the historical mean (in terms of standard deviation) defines market volatility conditions. Van defines normal volatility as within 1 standard deviation (SD) on either side of the mean, quiet is more than 1 SD lower than the mean, volatile is between 1 and 3 SDs more than the mean and very volatile is more than 3 SDs above the mean. I don’t believe he found any such thing (statistically speaking) as very quiet conditions in his data.
The mean S&P 500 ATR% is 1.5% and the SD is 0.503%.
RJ Hixson
