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Volatility Update: At About 12, Is It Possible VIX Is Too … High?

August 18, 2016
Balanced egg: What do low VIX levels mean in terms of historical volatility for the SPX?

Investors are navigating the summer doldrums in quiet fashion as the S&P 500 has been setting a series of record highs through mid-August. The large-cap index is up a modest 0.6% for the month, and daily market moves seem to be getting smaller and smaller. As a result, many measures of volatility are at, or near, lows for 2016. In a rare move, one gauge has dropped to levels not seen since December 2014.

Although there’s no way to know how long the extreme low readings might last, low levels of volatility typically don’t last indefinitely.

VIX Dips to Near 11

The CBOE Volatility Index (VIX) reflects the recent market lull. The index tracks the expected or implied volatility priced into a strip of S&P 500 Index (SPX) options, and it's been chopping lower as the SPX treks to record highs. As you can see in figure 1, VIX even approached 11 last week for the first time since August 2015. It’s obviously well below the levels in the mid-20s seen in mid-June.

CBOE Volatility Index


VIX seems to be gyrating between 11 and 12.5. Data source: CBOE. Chart source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Although VIX is typically viewed as a forward-looking gauge because it tracks implied or expected volatility, the index often reacts to changes in actual market conditions as well. That is, if the market trades quietly, then the volatility index might tick lower to reflect the market’s subdued underlying tone. In the past month (through August 11), the average daily move in the S&P 500 has been just 6.2 points. That, in turn, compares to average daily moves of 13.8 points during the first seven months of the year.

Historically Speaking of Volatility

The market’s rather small daily moves are reflected in more than one measure of volatility. For instance, the 30-day historical volatility (HV) of the SPX is falling sharply. Computed as an annualized standard deviation of closing prices over the past 30 days, the 30-day HV of the SPX has fallen below 8% for the first time since late 2014. The lower pane of the chart in figure 2 shows the dramatic decline in HV to less than 8% over the past week.

SPX and 30-day historical volatility


HV drops as the SPX forges new highs in quiet fashion. Data source: CBOE. Chart source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

SPX 30-day HV of less than 8% doesn’t happen often and, when it does, it historically hasn’t lasted too long. It last happened on December 3, 2014, when HV fell as low as 7%. But by December 9, 2014, HV began climbing higher. Prior to that, 30-day SPX HV fell below 8% in early July 2014 and stayed below that level through the month before climbing again in August. The longest stretch of sub-8% readings was from early September 2006 to early February 2007, or roughly five months.

Since February 2007, 30-day HV of the SPX has fallen below 8% just nine times. The average number of trading days before it climbs back above that level is roughly 10 trading sessions, or two weeks. Therefore, if the averages play out (and, of course, they rarely do), then we might expect actual volatility to start climbing in late August or perhaps not too long after the three-day Labor Day holiday weekend.

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