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Volatility Comeback

Over recent months it has rested quietly in a rear row corner of a darkened theater, but it has now begun a deliberate yet unmistakable move toward the center and back under the stage lights. The most commonly appealed to proxy for U.S. Stock Market Volatility --- the CBOE Volatility Index (VIX) --- will soon command a wider berth of attention. With the premise that any reading below 20 describes a quiescent market headed inexorably higher in price, consider its behavior over six month intervals ending the recent May 31. Readings are accompanied by a 200 Day Moving Average of percent changes from daily high to daily low on the Dow Industrial Average, its own closing level printed to the far right of the Table:

Date VIX DJI - % DJI Close

May 31, 2012 26.22 2.21 12393.45

Nov 30, 2012 15.87 1.01 13025.58

May 31, 2013 16.30 0.85 15115.57

All seems within normal and rational expectations. A decline in daily volatility of the DJIA has been faithfully accompanied by a lower VIX, although in May's closing sessions (not shown here) each metric has come off its absolute low.

What about another Index and another way to scan the picture? The following table depicts a 200 day average of the absolute value of daily percent changes in the S&P 500. A slightly different visual angle points in the same direction:

Date VIX SPX - % SPX Close

Date VIX SPX - % SPX Close

May 31, 2012 26.66 0.98 1310.33

Nov 30, 2012 15.87 0.62 1416.18

May 31, 2013 16.30 0.54 1630.74

Thus has the recent bull market been largely of a single vector --- straight up. Not surprisingly has it fostered complacency in the minds and hearts --- and hopes --- of some.

The contention is that a reversal is underway in both prices and volatility. At this writing the SPX is off less than 3.5% from its recently posted all time best. It shows signs of further toboggan rides down the slope. At the same time VIX has begun to percolate. Between today in mid-October investors are advised to look for as range of 1380 - 1420 on the S&P, accompanied by VIX poking its way again decisively to the North side of 20.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.