For those of you in the U.S., I hope you had an enjoyable Thanksgiving weekend. As we close out November and move into the final month of 2019 volatility has contracted across the board in domestic and global equity markets. This extends my view I wrote about previously that my analysis shows a structurally sound market from a breadth perspective but a growing froth in sentiment and volatility.
S&P Global puts out a monthly chart looking at the dispersion, volatility, and correlation of various markets and asset classes. S&P shows the data in the form of of monthly percentiles since 2007. As you can see on the chart below, volatility and correlations, for the majority of the markets shown, are at or near the 5th percentile. Correlation is now back to levels last seen in late 2017 and mid-2018 for the S&P 500 and many volatility indices across the globe have declined to their lower historical bound.
Looking at domestic volatility indices for the Dow, S&P, Nasdaq, and Russell 2000 as a composite, compression has rarely fallen to this level and not resulted in a material rise in spot VIX. I showed this chart previously in a guest post for Josh Brown’s blog in April ’19 just before volatility went from 13 to 22 over the next two weeks. We’ve now exceeded the compression from last April and are at a level experienced in October ’17 and January ’18. While the October instance marked near a low in spot volatility, it took another push down in compression to add enough sentiment froth to setup for a spike higher in the VIX. I’m not expecting a repeat of the January ’18 move, but I do believe we’re at a point where I expect the pressure to be released in volatility and see the VIX breakout above prior short-term highs of around 14. As always, I respect the market’s price action and maintain patience for confirmation.
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