A New Extreme in Volatility

A New Extreme in Volatility
The last time I reviewed this chart I pondered the possibility of a turning point or the start of a regime change for volatility… this was premature.  Since then this alternative view of volatility for the S&P500 – the rolling 12-month count of daily price moves exceeding +/-1% has moved lower to a fresh 22-year low: matching the low point in December 1995. It is now very close to reaching the 1973 low (in fact, just another 13 trading days without a 1% move will get us there, so this is indeed extreme).
What’s also interesting is if you change the parameters of the indicator e.g. to +/- 0.50% it drops to just 59 (i.e. only 59 days in the past year did price move by more than 50bps either way). This is the lowest reading since 1965.  Similarly if you change the parameter up to 2% (plus or minus), the indicator shows just 1 day out of the past 12 months had a move greater than 200bps either way.  It makes for a very calm market experience, and I believe this is a key reason why investor optimism has risen so significantly.

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Lower volatility can be a blessing in that it encourages investors back into the markets due to a perception of safety, this in turn drives prices higher and volatility lower - a virtuous cycle.  This cycle will get broken at some point, because one thing we know about markets is that extremes never last, and extremes often signal that a turning point is near.  Whether a market regime change to a more volatile and erratic bull market, or to turbulent times of a more sinister nature, low volatility may last - but not forever!
The rolling 12-month count of daily price moves exceeding 100bps +/- has dropped to a fresh 22-year low.  Volatility is extremely low by this measure, and is unlikely to stay that way.

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Changing the parameters for the indicator shows even more extreme readings at the 50 basis point level - it gives the lowest reading since 1965, truly remarkable times for the market.  Calm prices and steadily higher stocks at an index level make for fertile ground for investor optimism.

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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.
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