The S&P 500 (SPX) staged a nearly 7% rally in the first three weeks of October—action that crushed several measures of stock and commodities market volatility.
The bullish underlying tone stands in stark contrast to the extreme negativity seen just one month earlier—an atmosphere set off by China’s repeated growth warnings. And it sets up an interesting backdrop heading into the final two months of 2015, a period that has historically been stock-friendly.
Back to 2015 Lows?
The broad stock market mood measure, the CBOE Volatility Index (VIX), dropped some 40% month-to-date through Friday. VIX recently dropped to two-month lows and to levels not seen since before a major spike in late August. Recall that the volatility index hit an extreme of 53.29 during the panic market sell-off of August 24. Just a few weeks earlier, VIX was at the lower end of the 2015 range and had hit 52-week lows below 11 (see figure 1).
After the August–September retreat, many observers thought VIX might settle into a range near the historically “normal” 20 line. Its return to sub-15 has some traders asking if VIX has fallen too far, too fast.
Not VIX Alone
Indeed, the decline in VIX is part of a larger trend across the listed options market in October. Other indicators, including the CBOE NASDAQ Volatility Index (VXN) and the CBOE DJIA Volatility Index (VXD), have dropped sharply. Even volatility in markets that are not necessarily highly correlated with equities are trending lower, including oil and gold (see the table below).
|October ||Year to Date* |
|S&P 500 Volatility ||VIX ||-39.6% ||-22.9% |
|NASDAQ 100 Volatility ||VXN ||-40.6% ||-18.9% |
|Dow Volatility ||VXD ||-36.6% ||-14.1% |
|Russell Small-Cap Volatility ||RVX ||-27.6% ||-18.7% |
|Oil Volatility ||OVX ||-11.6% ||-19.9% |
|Gold Volatility ||GVZ ||-10.8% ||-22.4% |
|Emerging Markets Volatility ||VXEEM ||-32.0% ||1.8% |
|Brazil Volatility ||VXEWZ ||-15.0% ||37.2% |
|Eurocurrency Volatility ||EVZ ||-1.1% ||11.1% |
|China Volatility ||VXFXI ||-24.4% ||17.0% |
|Treasury Bond Volatility ||TYVIX ||-11.7% ||-8.6% |
Perhaps the plunge in many volatility indexes in October is not so unexpected. The high readings in late September were a bit extreme, and the equities market is entering a seasonally slow period into November and December. The drop in the volatility barometers may suggest that market participants are anticipating—and pricing in—the possibility of quiet trading heading into late fall and the holiday period.
But the action seen since early August, with VIX moving from 52-week lows to 52-week highs in just a few weeks, is a reminder of just how fast things can change on the volatility front—and why being prepared for the unexpected is never a bad idea.
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