With spring training just getting underway in Florida and Arizona, I think it is appropriate that I once again have an opportunity to pinch hit for Steve Sears in his The Striking Price column for Barron's. Today's column is called Putting Low Stock Volatility to Good Use (my title suggestions always seem to end up on the cutting floor) and builds upon some of the ideas I presented three years ago in Low Volatility: How to Profit from a Quiet VIX.
If my memory is correct, this is the twentieth time I have been a guest columnist at Barron's in this fashion, and in keeping with tradition, I always try to make the column topical, particularly when there are some aspects of volatility that have investors more perplexed than usual. Lately, it has been the persistent low VIX readings (including the first sub-10 VIX print in a decade) in conjunction with a new administration and extremely high policy uncertainty that has been difficult for investors to digest. While I too have dedicated a fair amount of effort to square low volatility with high policy uncertainty, my research related to volatility has made it easier to stick with the trend instead of trying to anticipate a market turn.
Specifically, in the Barron's article I note:
"Statistically, it turns out that the vaunted mean-reverting aspect of volatility is much more likely to kick in with a high VIX than a low VIX. Similarly, low volatility tends to cluster and persist for extended periods, defying skeptics. Specifically, when the VIX dips below 12 for several months, the historical record shows it can be expected to continue with similar readings for two years or more."
As Barron's is not necessarily the best place to try to shoehorn original research into a short column, I thought I could use this space to expand upon some of the points I made. Specifically related to the clustering of low volatility, the graphic below shows that when the VIX closes below 12, it tends to persist in these low readings, clustering for several years, before remaining above 12 for even longer periods during high volatility regimes.
[Source(s): CBOE, VIX and More]
A corollary to the above is that while investors often focus a good deal of their VIX analysis on mean reversion, it is important to note that mean reversion is much more predictable and tradeable following a VIX spike than after a significant decline in the VIX.
There are some other interesting statistics and ideas in the Barron's column that I will address in other posts shortly, not the least of which addresses the performance of the SPX in the years following extreme high and extreme low VIX readings. Stay tuned.
Finally, since I enjoy being a pinch hitter so much, I thought I might highlight one pinch hitter for every new Barron's column I write. This time around I'd like to put the spotlight on Rusty Staub, who just happened to be at the zenith of his pinch-hitting duties when I moved to New York. In the twilight of his career, the charismatic Rusty tied a National League record in 1983 with eight consecutive pinch hits and also tied the Major League record with 25 RBI from those (24) pinch hits. Rusty finished his career with exactly 100 pinch hits and is currently 19th on the all-time pinch hit list. I realize I have a long way to go to get to Rusty's rarefied air, but 100 pinch hits is something to shoot for.