[Dogpile]

good question walter... there is a good argument that when there is so much capital out there, 'the system' quickly arbitrages anything that gets out of line and so price never gets that far before it comes back into line -- causing a loss of volatility. the same though could be said in 1998 when all of Wall Street was basically implementing the same 'relative value' strategies that LTCM was doing.

I think you need an 'event' once in a while to keep the volatility going. ie, 1997 had Thai devaluation causing ripple effects. 1998 saw the LTCM event that caused the financial sector (banks -- a major sector in the S&P500) to get really volatile. 1999 had a 'high-beta' sector (tech/media/telecom-TMT) enter a boom. 2000 saw that major TMT sector bust. 2001 was a recession year with 9/11 thrown in. 2002 saw the Worldcom fraud. After that, no major event really hit. You just kind of worked off the hangover of the bubble with real estate stocks steadily climbing (REIT's and financial stocks are generally low-beta and homebuilders are insignificant part of the index).

So you had a 4-year bear market in volatility. Now here we are with bank-related stocks (XLF) getting volatile again - just like 1998. A recession would certainly cause more extreme volatility. Alternatively, a boom from a high-beta sector might keep things volatile (emerging markets). Until recently, emerging markets have been noticeably non-volatile. But that could change. Emerging markets are growing 10-15% per year -- you would think that there would have to be some up or down volatility associated with that kind of growth. Inflation and/or recesssion (bust) would seem to be likely at some point. Scandal could also hit.

Net net, that is a great unknown. I have loved this volatility. That said, Thursday and Friday were a little too volatile for my taste. Its hard for me to think about 'trade location' relative to previous day when you are having such massive gaps every day.