Volatility is low. There’s no denying that. Spot $VIX closed out last week under 12.50, hitting a new 3-month low – only to be exceeded this year by levels briefly seen in April and July. So does volatility reaching such low levels suggest that it will immediately spike to the moon? Short answer: No.
One of the topics I covered in my Charles Dow award winning paper, Forecasting A Volatility Tsunami, was the poor predictive power of assuming because volatility is “low” that it will spike higher. As I wrote in my letter to Thrasher Analytics subscribers last night, the Volatility Index has historically slowly advanced ahead of any major spike higher. We saw this play out in Q4 of last year. I wrote a post, The Volatility Clouds Have Begun to Darken on August 6th, two days before the VIX bottomed. But it slowly ground higher until finally showing some fireworks in early October. We also saw this in January ’18. The VIX bottomed nearly a full month before it had its February 5th ‘episode’ that took down XIV (R.I.P).
As always, we should turn to the data. First let’s take a look at how often the VIX hits a new 3-month low while being under 20. Since January 2009, this has happened 143 times.
How many of these were followed by the VIX rising by at least 50% over the following 5 days? Three. Give it one more day and the count hits 6 (as shown in the chart below). Some may be asking what’s some special about 3-month lows? I also looked at 1-year and 1-month lows as well – both of which gave the same or very similar results to using a 3-month look-back period.
[Side Note: Yes, I’m using a percentage change of the VIX, which itself is a percentage. I realize this is mathematical faux pas, but it makes the topic easier to follow and normalize so cut me some slack.]
Does this mean the VIX will continue to move lower and eventually hit zero? No. I am still in the camp that there’s a risk within the market concerning volatility, which I’ve laid out in much more detail in my Thrasher Analytics commentary. What this data shows, and what we saw just last year, is when volatility is coming off a multi-month low, it typically moves in a slow trend before any major moves take place (if one is to). I do think sentiment is elevated and volatility is being overly discounted, but my analysis likes with data that’s well beyond “VIX is low.”
With all that being said… It’s probably safe to assume now that I’ve written this post that some ‘tail event’ will take place in the next five days sending volatility to 40 and my inbox will fill up with “told you so” anonymous emails. c’est la vie.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.
