Wry & Dry

Bollinger: not just champagne

W&D is a fan of Absolutely Fabulous, where the term "I need some Bolly, darling" refers to the rather delightful Bollinger champagne.  (Sadly, the current Ab Fab movie is as flat as a day-after-opened bottle of Bolly).

But readers will know that Bollinger also refers to Bollinger Bands#*.  In case you missed it, Bollinger Bands are measures of share-market volatility.  They refer to the peak and trough of a market price relative to previous trades, essentially the measure of the market's daily trading range.

Who cares about Bollinger Bands?

Well, it seems as though no-one is paying attention to the US stock-market.  The Olympics are on, traders are in Europe or at the Hamptons** and trainees are on the trading desks.  Yawn.  

And so the stock-market's Bollinger Bands are narrow.

But a northern summer has happened before.  So have the Olympics.  And Europe and the Hamptons will always be there.  So readers would expect the Bollinger Bands to narrow.  

Well, yes.  But last week saw the narrowest Bollinger Bands since 1959.  See in the chart below the narrowing of the gap between the green line (upper band) and red band (lower).

Bollinger Bands

OMG!  What is happening?  

Ssshhh, calm down.  As a long-term investor, you shouldn't be concerned.

The way W&D sees it, the extremely narrow bandwidth is a sort of equilibrium between the bulls (those who think the market will rise) and the bears (fall).  Plus the northern summer somnolence.

Looking at the current Bollinger Bands and comparing it to what happened after each of the five narrower Bollinger Bands (Nov-65; Aug-95; Nov-65; Mar-57 and Dec-59), the market 'breaks out'.  That is, shoots up for a little while, or down for a little while. 

In each of the six cases, the market was in an uptrend leading up to the narrow Bollinger Bands.  But in only two of the cases 12 months later was the share-market significantly changed.  In 1995, it rose another 18.8%.  And in 1965 it fell 12%.

So, what's the point?

The point is that many readers pick up market jargon and tips from taxi/ Uber drivers, work colleagues (medical specialists and barristers especially) and neighbours.  W&D reckons that readers will hear the term Bollinger Bands sooner or later.

If not, feel comfortable in injecting the term into conversation.

You can then discourse at length, summing that they probably don't matter.

# W&D acknowledges an article by Erik Conley in www.seekingalpha.com on 14-Aug-16 as the basis for this piece.

*Bollinger Bands is a share-market trading tool invented by John Bollinger in the 1980s.  For the technically minded reader; Bollinger Bands consist of:

  • an N-period moving average (MA)
  • an upper band at K times an N-period standard deviation above the moving average (MA + Kσ)
  • a lower band at K times an N-period standard deviation below the moving average (MA − Kσ)

Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages is a common second choice.

** The Hamptons, on eastern Long Island's South Fork, is a string of seaside communities known as a summer destination for affluent New York City residents. It’s marked by long stretches of beach and an interior of farmland, towns and villages with 18th-century shingle buildings and estates hidden behind tall boxwood hedges. East Hampton is home to high-end restaurants, bars and designer boutiques.