Market volatility – Siesta time
With the markets having traded like when pushing a cork into the water, it always come back up, many investors are now once again feeling the security of low volatility.
It was only a year ago when the world was imploding and the VIX traded at 40+. A few points on the lazy VIX, by Doug Short.
Let’s review the recent volatility, or absence thereof) in the S&P 500. The first chart below features an overlay of the index and the CBOE Volatility Index (VIX) since 2007. The current levels of this index are well below the 20 level, a traditional traditionally associated with increased market risk. A recent WSJ article summarizes the usual interpretation of this indicator.
As the chart above illustrates, the correlation between the S&P 500 and the VIX is inverse but imperfectly so. The lower low in the summer of 2008, when the index nearly dipped to 1200, came with a lower VIX in the upper 20s. More significantly, the unprecedented surges in the VIX above 80 in late 2008 predated the actual index low by over three months.
A key to understanding the VIX is to realize that it can be far more volatile than the index to which it is attached. The next chart inverts the VIX values, which helps us see more clearly the greater degree volatility and the fact that the VIX tends to lead the S&P 500.
The VIX at the current levels suggests that the mood of the market is siesta mode — quite different from this time last year. In fact, the 15.28 of yesterday’s close is a level that the index hasn’t consistently held since the early summer of 2007. Here is a longer-term look at the S&P 500 and VIX that gives us a better sense of how this indicator has behaved.
The question, of course, is how long this siesta will last.