Help me out of my confusion: I just read in a research report, that the low volatility in stock markets (VIX of S&P500 @12) is at the moment a warning signal among sentiment indicators. I always considered a HIGH volatility as a danger for a trend reversal, like in the 2000s…
Well I don’t know who produced this report, so the authors’ reasoning might be specific, but in asset management, I can tell you that the historically low volatility (measured by VIX or otherwise, like rolling standard deviation of S&P500 outright throughout history) is seen today as being “unnaturally low” and supported by fiscal and (primarily) monetary stimulus.
The thought is that a bit of volatility is good for enforcing a proper valuation of equities. If it is too low, then convergence to “true” value is not helped, allowing bubbles to form.
Of course, I don’t really know if I agree with any of this. See my post on the term “correction” as used in the context of market downturns: http://www.analystforum.com/forums/water-cooler/91334233.
I think in this environment, volatility scares investors so much that the Fed has tended to intervene in response to volatility increases and this leads to the expectation of more. I agree that volatility is disturbingly low and at some point it needs to break upwards. And it’s not likely to be pretty when it does.
It’s been disturbingly low for a relatively long time. May continue to be so too.
The last time the VIX was this low was in December 2006. The VIX is a measure of implied vol, not current vol. The VIX will typically spike after a major market decline, when the options market incorporates the most recent stock market volatility and all the traders get scared. The highest VIX ever was in 4Q2008. That was too late. In fact, the second spike was in Feb 2009. That was the perfect time to be buying. For me, when the VIX spikes that’s when I’m making money.
Right now, it’s much tougher. Everyone thinks there is a bubble. While it’s reasonable to worry that bubbles are developing it is not reasonable to try to time the top. There is no way to know when to get out. It is much easier to make money on the other end of the cycle.
2005 and 2006 were among the lowest in history. The rest is history. VIX is as cyclical a measure as you will find.
Thanx for your opinions so far
“Fed officials expressed overall confidence that moderate economic growth will continue and unemployment and inflation will gradually move towards the central bank’s targets. If anything, there was concern recent low volatility in financial markets showed investors “were not factoring in sufficient uncertainty.””