What a heart stopper, eh?

A 416 point drop in the Dow Jones, the biggest down day since 9/11... Is it the end of the world or just a one day aberration?

I wish I knew. Futures this morning are optimistic. We won't know for sure what will happen until the bell rings and real money starts changing hands.

The first thing I did when I heard the news was to have a look at what this extraordinary trading day meant in terms of recent market closes. Specifically I wanted to know just how extraordinary this event was in relation to what we've become accustomed to.

The attached chart illustrates what I'm talking about. Click it to see the full-sized view at the end of this article. The chart shows a rolling 30-day average price change and standard deviation for the ticker symbol DIA, commonly referred to as Diamonds. DIA is an Exchange Traded Fund created expressly for the purpose of tracking the performance of the Dow Jones Industrial Average. As the Dow 30 change, so does the price of DIA.

Look at the blue line. It shows the average change in closing price of DIA on a rolling 30-day basis. Not unexpectedly the trend is generally upward.

In recent months the changes have moderated quite a bit. The jagged blue line has settled down just about on it's long term trend line. Personally, I would classify this as odd behavior. Markets don't move in a generally linear fashion. Seeing one do this feels strange.

The other line, in pink, represents the 30-day rolling standard deviation. It's a measure of volatility. As you can see, volatility in general - the trend line is a simple linear regression - has been trending downward for a while now. This is especially true in the last 4 years.

Unfortunately the effect of yesterday's 416-point drop in the Dow on the chart is not very visible. The standard deviation line took a leap upward yesterday and now sits nearly as high as the peak charted in mid-2006. Could we be entering a phase of increased volatility?

Just as nature abhors a vacuum, markets despise any semblance of regularity. Recently the market - as characterized by the Dow 30 index fund, DIA - has been behaving almost linearly resulting in low volatility and regular gains. Yesterday the market showed us it will never be tamed.