After several weeks of relatively quiet trading, many measures of market volatility were back at low levels in the early days of September. Indeed, the S&P 500 navigated a rather narrow range in August and added a mere 0.4% for the month. Average daily moves were quite small and trading volumes slumped. The situation stands in stark contrast to a very volatile month in August 2015.
Could this set up an interesting situation heading into the seasonally weak period of September?
VIX Drops to Near Multi-year Lows
CBOE Volatility Index (VIX) slumped Friday after monthly jobs data were announced. While the numbers were a bit shy of economist expectations (with the headline showing 151K jobs created compared to 180K consensus estimates), the S&P 500 ticked higher Friday morning on the data and ahead of the 3-day Labor Day weekend.
As you can see from the 2-year chart in figure 1 below, VIX dipped back toward 12 on Friday, September 2nd. The market’s so-called “fear gauge” is now a far cry from the 30+ levels seen in early September 2015.
The low readings from VIX in early September follow a period of low actual volatility. Indeed, August 2016 was characterized by small daily moves in the S&P 500. The average daily range from 8/1 to 8/31 was just 6 points. This compares to average daily moves of 23 points in August last year, which included a 43-point drop on 8/18, a 65-point dive on 8/19, and a 77-point tumble on 8/22. By way of comparison, the S&P 500 has seen only one move in excess of 50 points in all of 2016. That was a 77-point tumble on 6/24 after the UK referendum, which was quickly recovered over the two weeks that followed.
Low Flows: Options Volume Dries Up
Trading volumes were much different in August 2016 compared to August 2015 as well. According to the Options Clearing Corporation, average daily options volume in August 2016 was 14.4 million contracts and that represented a 30.4% drop from August 2015, when the big spike in volatility spurred average daily volume of 20.8 million contracts. In fact, while August last year marked one of the highest option volume months on record, August this year was the lowest average daily volume for puts and calls since October 2012 as you can see in figure 2.
It’s not unusual to see light volumes and lower volatility in August due to the fact that many investors are on vacation. Indeed, the surge in activity in August 2015 seemed to be an exception to the rule. But now it’s time to focus on September as volumes are likely to return to more normal levels. Will volatility follow? There’s no way to know for sure, but it’s interesting that September is often seen as the seasonally weakest for the equities market. The average loss in the S&P 500 since 1950 is 0.5%, according to the Stock Trader’s Almanac.
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