Chart of the Week: Volatility Drifts Lower

While stocks gave back some gains this week and any sense of inevitability was stricken from the consciousness of the bulls, volatility only grudgingly began to reappear on the charts.

In fact, if you look at the chart of the week below (click to enlarge), you see more concern about future volatility in the form of the VIX than there are indications of rising current volatility, as reflected in the average true range (ATR) of the S&P 500 index. I elected to use the 21 day setting for the ATR, as it is based on trading days and approximates the 30 calendar day time horizon used by the VIX. For the record, shortening the ATR window to 10 days shows the same pattern of declining volatility. The SPX historical volatility picture is similarly calm, with 20 day historical volatility hovering around 31 at the moment.

Even with the markets selling off this week, volatility remains relatively low, at least as measured by post-Lehman standards.

Comments

[jepittman:]

To me the declining volitility is evidence investors are calming down from the fear of October and November. As the markets calm down, consumers will also calm down and begin to resume more normal economic behavior. This is not to suggest a resumption of all old habits but a change from the 'lock down' mode they went into in the fall when they really were not sure what was going on. As frayed nerves calm, the economy's rate of descent hopefully can moderate and gradually begin to stabilize.

Jan 11 01:53 PM

[R. Ennis:]

Perfect storm brewing. As the VIX settles and calmness is felt all around it will only be a matter of days before the market gets slammed as it comes out of the eye...there are 240 mph winds just beyond this eye. They are made up of REITS, Citigroup, JPM, and small business bankruptcies.

Only a nut or loony would be buying now. I should also point out that VIX calls are getting a nice premium and the bets are on that VIX is back in the 50's before end of January...

Jan 11 03:25 PM

[jepittman:]

Interesting viewpoint. We will see.


On Jan 11 03:25 PM R. Ennis wrote:

> Perfect storm brewing. As the VIX settles and calmness is felt all
> around it will only be a matter of days before the market gets slammed
> as it comes out of the eye...there are 240 mph winds just beyond
> this eye. They are made up of REITS, Citigroup, JPM, and small business
> bankruptcies.
>
> Only a nut or loony would be buying now. I should also point out
> that VIX calls are getting a nice premium and the bets are on that
> VIX is back in the 50's before end of January...

Jan 11 06:07 PM

[L Boyd:]

I will apologize in advance for the quality of this post but...

Bill, you look like Brett Favre. Have you heard this before?

Jan 11 06:36 PM

[Timmothy Posey:]

VIX is still double that of where we were back in September. And even then we were already in turbulent times.

Jan 11 07:11 PM

[Moon Kil Woong:]

It is peculiar. Volatility should go up. Perhaps it is the fact there is such low turnover now. Pretty soon the mutual funds and banks can play tiddley winks with one another because there will be no other ones left in the market.

Jan 11 10:26 PM