You probably noticed that levels of volatility in the first two weeks of September stand in stark contrast to the pattern during July and August. For instance, through September 15, the average daily move in the S&P 500 Index was 16 points, which was nearly double the average daily moves of 8.2 points from the previous two months. It’s a sign that actual or historical volatility was on the rise and, interestingly, this increase comes a little more than a month after one measure of volatility saw a record one-week decline.
VIX Spikes in Historical Context
The most widely watched measure of volatility has certainly moved higher. The CBOE Volatility Index (VIX), which is a measure of implied volatility derived from a strip of short-term S&P 500 Index (SPX) options, finished August near 13.5, but as you can see in figure 1, reached above 20 through Monday, September 12. It ticked lower in the days that followed. But still, at 16, the index is well above any levels seen during August.
Real Volatility Surges
The uptick in VIX is not entirely surprising as the market exits what many traders consider to be the seasonally slow summer period and enters what some traders consider the historically worst month for stocks. The SPX has lost 0.5% on average during September since 1950, according to the Stock Trader’s Almanac.
As noted earlier, actual levels of market volatility have increased as well. Figure 2 shows the 30-day historical volatility (HV) of the SPX and the sharp increase in the first two weeks of September. While VIX is computed using options pricing models and SPX options premiums, SPX 30-day HV is a measure (annualized standard deviation) of closing prices of the index over the past 30 days.
From September 7 to the 14th, SPX 30-day historical volatility increased from 5.2% to 10.7%. That’s more than 100%. This big jump left me wondering how often levels of market volatility more than double over just one week. The answer: very rarely. In fact, the last time 30-day HV of the SPX more than doubled in just a week was October 1989!
Now, you’re probably asking yourself: When was the largest one-week drop in 30-day historical volatility of the S&P? Excellent question. As it turns out, it was just over a month ago when it dropped from roughly 16% on August 5 to less than 8% on August 11. That 50% drop was the largest ever seen, with data going back to the mid-1980s.
So, from August 11 through September 14, the S&P 500 has seen its realized volatility (30-day HV) see a record one-week decline and, slightly more than a month later, the biggest one-week increase in over 25 years. So it appears that volatility has been getting more volatile! In other words, changes in volatility, as measured by the daily moves in the SPX, were happening quite rapidly. This serves as an important reminder that market conditions can, and often do, rapidly change.
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