Expect Volatility To Come Back With Vengeance
The CBOE Volatility Index, VIX aka the stock market fear gauge, is a popular measure of the stock market's expectation of volatility implied.
Devesh Shah, an applied mathematician and hedge fund manager who formerly worked for Goldman Sachs, was one of the creators of the CBOE Volatility Index
The VIX is quoted in percentage points and is the expected annualized change in the S&P 500 index over the following 30 days, with a 68% probability. VIX values greater than 30 represent investor fear or uncertainty, while values below 20 represent complacent in the Markets.
The last several years the Markets have been very complacent. However, the VIX reminded us that we need to respect and not forget it this past February when the VIX increased by more than 100%.
In 2017, S&P 500 had only six 1% moves in a day. So far in 2018, we have seen the S&P 500 move more than 1% in a day, 16 times down and more than 1% in a day up, 20 times up. Since 2007 and pre-2017, the S&P 500 has had 1% daily moves on average 77 times per year.
Another way to look at volatility is to look at the intraday daily range which is the high minus low, divided by the prior day’s close. The average daily range in 2017 was 0.6%. This is less than half the pre-2017 average of 1.3%.
Reversion to the mean is a price will tend to move back to the average over time, meaning deviations from the average price are expected to revert back to the average.
Thus, at some point, volatility and the intraday daily range must get back to the averages at some point.
Support and resistance is probably the most basic form of technical analysis. Often times, a support level will eventually become a resistance level when the price attempts to move back up, and conversely, a resistance level will become a support level as the price temporarily falls back. When I look at the VIX on a weekly chart, what I’m seeing is volatility broke the down trendline, which is now acting as support.
What we saw in February was just a pre-cursor because the most volatile quarter of the year (Sept thru Dec) is coming up.
To further support the thesis that volatility will return is as of last week, we are in the longest bull market in history. Like gravity (on earth) what goes up, must come down…eventually.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
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by rollandthomas
Great timing with the article for me! I have traded the VIX a couple of times this year unsuccessfully and I was thinking of trying again with buying some call options on the VIX.
One suggestion is to buy some leap call options to give yourself some time for the trade to work out.
Thanks for the suggestion.
Its crazy nowadays that people get freaked out when the Dow moves 100 points when that is now less than 0.5%. Even a 200 point move is less than 1% yet it captures the headline. I think it has to do with the amount of leverage in these markets as the Fed has continued to encouraged risk taking in the markets. However, we have seen some cracks this year as volatility wants to come back. With the amount of positions ready to trade at a flip of the switch, things could het out of hand quickly. Hopefully, investors have the stomach for it...
I like it a lot, all the indices look extended and I saw a very bearish Dow chart. The Dow better pick it up or it will drag everything down with it.
PS how did you get your TIMM footer :)
Just ask one of the TIMM guys, I will let them know you are interested as well.
The VIX has been a rather easy trade for people for far too long. I have even made good money on it shorting any big spike the past couple years. I will be keeping an eye on it more often again and look for spots to even get long with long date options.
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STOPTo support your work, I also upvoted your post!