JohnPrestbo

NEW YORK (MarketWatch) — In case you hadn’t noticed, the stock market recently has turned more volatile.

To be sure, volatility hasn’t yet returned to the level of late February and early March. The Dow Jones Industrial Average DJIA, +1.47% fell like an anvil (416 points) on Feb. 27 and then proceeded to slide another 400 points before hitting bottom on March 14.

The market rallied fairly steadily after that, until early this month when it sank 400 points again. Curiously, volatility declined while the good times rolled. That was because of the fairly steadily aspect of the upswing. Volatility really means fluctuation of returns around a trend line, whether from an individual security or an index of many securities. Slow-but-steady around a trend doesn’t generate much fluctuation.

Volatility is an important indicator for investors to monitor because it helps illuminate the pull and tug between greed and fear. Rising volatility means increased uncertainty about what will happen next. If at some point that doubt intensifies into anxiety, investors begin heading for the exits. Falling volatility means increased confidence that values will not fluctuate radically around the trend.

Why is there volatility at all? We know the long-term trend in stocks is about a 9% gain each year, so why doesn’t the market simply rise smoothly by that amount? Markets are made out of differences of opinion, as well as the diverse ways that participants act on those differences. The resulting volatility sometimes enables investors to buy lower and sell higher than would be possible in a straight-line market.

Shifting sands

The most common statistical measure of volatility is the dispersion around the average return during a particular period. The statistical name is standard deviation from the mean. Over the past two years, the volatility of the Dow Jones Wilshire 5000 — which includes practically every listed equity security in the United States — was 10.2% on a daily return basis. Over the month ended June 12 it was 11.2%.

By contrast, the Dow’s two-year volatility was 9.5% versus 9.9% over the recent month — considerably less volatile than the broad market. Thus, perception of market volatility depends on which index lens you’re looking through and which period you’re looking at.

That point applies equally to another way that volatility is measured, which is relative volatility and is sometimes called beta. Usually, this measure is used to compare a stock’s volatility against the market’s. The market always has a beta of 1.

For the 30 months ended in March, Exxon Mobil Corp. XOM, +0.24% had a beta of 1.35 against the DJ Wilshire 5000, which means it was 35% more volatile than the broad market. That compares to a period during the bear market in late 2001 when the stock’s volatility versus the broad market approached zero — another way of saying Exxon Mobil shares resisted being swept along in the downdraft.

Another statistic, called R-square, measures the opposite — how much of the stock’s volatility can be attributed to market movements. In the case of Exxon Mobil, the R-square is just 19%, which means 81% of the stock’s moves are caused by something beyond the stock market, which in this case would be the price of oil.

Microsoft Corp.’s MSFT, -2.29% 30-month beta of 0.7 means it is less volatile than the market — in a 10% market move Microsoft could be expected to move 7%. But it was more than twice as volatile in the bear market when technology and telecom led the way down. Its R-square of 21% says this stock also moves mostly in response to idiosyncratic, non-market factors.

General Electric Co. GE, +0.83% also has become far less volatile in the past several years. Its 30-month beta is only 0.3 nowadays, but in the late 1990s GE was as much as 50% more volatile than the market. And market volatility accounts for 35% of GE’s moves.