The S&P 500 (SPX) fell to its lowest levels in more than a year last week, feeding a dramatic nearly 13% drop over the first three weeks of 2016 before a mild rebound. The decline appeared to stir up quite a bit of investor anxiety. As evidence, the CBOE Volatility Index (VIX) jumped above 32, its highest level since early September. But it’s not just VIX that’s moving higher. Other wide-reaching volatility barometers, including historical volatility, are also climbing.
VIX, sometimes called the market’s “fear gauge,” tracks the implied volatility priced into short-term options on SPX. It tends to rise when stocks fall, and vice versa. VIX finished 2015 near 18 (figure 1), but a short three weeks later had broken the 30 barrier.
Not Confined to VIX
Let’s look at other volatility indexes and their respective performances since the end of 2015. While VIX gained 51.5%, the CBOE NASDAQ-100 Volatility (VXN) and the CBOE DJIA Volatility Index (VXD) rose more than 55% each. Large global market moves pulled in the volatility measures on crude oil, emerging markets, and more. See the full array in the table below.
|S&P 500 Volatility||VIX||51.5%|
|NASDAQ 100 Volatility||VXN||57.1%|
|Russell Small-Cap Volatility||RVX||46.5%|
|Emerging Markets Volatility||VXEEM||58.9%|
|Euro Currency Volatility||EVZ||3.2%|
Source: CBOE. Data YTD through January 20, 2016.
VIX, VXN, and other indicators are derived from option premiums. They’re computed using option pricing models. While these indicators can help get a better sense of the actual volatility of the underlying securities or a broader sector, they also reflect expectations about the future. That is, they’re based on the level of volatility that is “implied” by current option prices.
Welcome Back to the Present
Actual volatility is quite high as well. Consider this: the average daily move in the S&P 500 during 2015 was about 14 points. So far in January, the average daily move is 25 points. Therefore, not only has the equity market been moving lower, but large daily moves are occurring from one day to the next.
In other words, the market’s actual volatility is moving higher, confirmed by the daily chart of SPX (figure 2). The chart shows that the 20-day historical volatility (HV) of the index is moving above 20% for the first time since October. While VIX is based on option premiums, HV is computed using the actual closing prices of the index over a number of days. For instance, 20-day HV had fallen toward 10% in November. It has nearly doubled since then.
VIX reacts when the equities market swings from periods of low volatility to periods of higher volatility, but VIX is also driven by sentiment based on future expectations. Historical volatility measures how the underlying security is actually behaving. In this case, real volatility on the S&P 500 has been climbing steadily higher since November, and that suggests that the stock market is making larger daily moves—not just on days when it is lower, but when it is moving higher, too.
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