S&P 500 Fifty Day Historical Volatility May Have Just Peaked

Something interesting happened yesterday that has happened very rarely over the past two months or so: 50 day historical volatility (HV) in the S&P 500 index dropped. While that fact in itself might not be worthy of a headline next to the latest installment of ‘Adventures in TARPland,’ there is a strong possibility that historical volatility in the SPX has just peaked.

Actually the 10 day version of historical volatility for the SPX peaked back on October 22^nd, followed by the 20 and 30 day HV topping out on November 5^th and November 7^th.  It is too early to say definitively that the 50 day historical volatility will not exceed Friday’s high, but the odds are in favor of it, as it is only a couple more days before the Lehman (LEH)-powered selloff of September 15^th scrolls off of the 50 day lookback window.

Now I’m sure this bit of volatility trivia is not likely to excite readers, so I have included a chart below (click to enlarge) which shows the last three times 50 day historical volatility in the SPX has peaked at a level of 30 or higher. While all three previous instances (marked by the blue arrows) have turned out to be excellent buying opportunities, finding historical parallels to help interpret the current market situation has lately been an approach fraught with danger.

A better way to think about historical volatility rolling over is that, like the VIX, historical volatility measures some of the uncertainty and emotional components of the markets. As these begin to pull back from recent highs, investors of all persuasions are more likely to enter the markets.

Comments

[JimWe:]

Interesting. Thanks.

I wonder if there is any comparable period of volatility - and where did the market go from there?

2008 Nov 18 06:50 PM

[Publicliter...:]

Bill,

You might be on to something. I think we've run out of companies that could fail to push the VIX to new highs. This news is comforting. Buyers should slowly trickle in as the VIX returns to normal levels. Once the VIX is down to the 20s, where do you see the S&P? I would have to estimate 1100 as a ballpark. Great, quantitative article.

2008 Nov 19 12:59 AM