Yesterday I wrote a guest post for Josh Brown’s The Reformed Broker blog, discussing the current volatility market. In the post I discuss the decline in volatility dispersion, which was the topic of my Forecasting a Volatility Tsunami paper and also a topic Josh, Barry Ritholtz, and myself discussed at their office a few weeks ago.
The chart I use in the post suggests we’ve entered a heighten risk environment for volatility. Going back the last ten years the VIX was higher 83% of the time one month later by an average of 22.6% (n=63). It’s become too easy to get caught up in the hundreds of narratives floating around about trade wars, earnings, and political infighting. Instead, I believe it’s important to stay focused on the market and using history has a guide while staying flexible for adapt to changing price action.
From a volatility sentiment perspective, things have gotten overly bearish, with Bloomberg recently running a story titled, It’s a ‘Golden Age’ for Short-Volatility Trades. This isn’t the ideal headline to be reading as markets break to new highs and volatility drops near single digits. I’d rather see headlines about a strategy being “dead” or no longer working to gain confidence in its viability, not ones calling it a “golden age”. I believe we’re now at an important inflection point, which I discuss further in my post at Josh’s site.
Here’s an excerpt:
Once again, volatility has begun to compress; except it’s not just in the VIX, volatility for the Dow, NASDAQ 100, and Russell 2000 also are seeing their respective measures of volatility decline to historically low levels. This has happened quite a few times over the last ten years, as shown in the chart below – many of the occurrences being followed by a rise in the VIX. This tells us that it’s not just the large cap S&P 500 stocks that are experiencing a degree of over-confidence as expressed by the Volatility Index, but also the other major U.S. equity indices as well.
Head over to Josh’s site to read the whole post: Is a Volatility Tsunami Imminent? (The Reformed Broker)
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