Stocks quoted in this article:
Pay no attention to that CBOE Volatility Index (VIX) on your screen. It took a 13% rally yesterday just to get it back to the mid-13s.
Volatility is back, baby! So says David Rosenberg:
After such a long period of relative calm -- only briefly interrupted by the "taper tantrum" of the spring of 2013 and the emerging market turmoil at the turn of the year -- volatility has reared its head yet again, and as is often the case, it started first in the currency market.
Near-6% moves in the U.S. dollar against the likes of the sterling and euro in a two-month span are hardly regular occurrences. Measures of implied volatility in the FX market have surged 50% over this time span.
Well, I do very much agree with his point that volatility can start in one asset class and then spread virtually everywhere. And, sure, the currencies did make a nice move recently. But the resulting volatility spike isn't exactly one for the ages. Not to mention the fact that the spike we did see is already in the rearview.
Here's the Guggenheim CurrencyShares Euro Trust (FXE) since the start of 2013. At the bottom of the graph, I include 10-day historical volatility (in purple) and the VIX formula of implied volatility (in light blue):
Daily chart of FXE since January 2013
(click to enlarge)
Implied volatility peaked at 8 a few days ago. Yes, that's right: 8. It's the same level it saw in late May, and late March, and most of February. It's also a level that was pretty much a floor in 2013.
On the other hand, implied volatility did nearly double from lows in the mid-4s back in early August. So, if anything, Rosenberg undersells the implied volatility lift when expressed in percentage terms.
But it's a good example of why you have to be careful using percentage moves in volatility from low bases. They can paint misleading pictures.
Here's a better description of implied volatility in FXE: It has lifted from the unusually low and unsustainable levels of the summer back to levels that are still on the low end of historical norms.
Now, the absolute move in FXE over the last four months is pretty large, and it has accelerated over the last month, but it's a pretty orderly directional move. Ten-day historical volatility barely budged, save for a one-day spike right after Labor Day. And I'm guessing that's misleading, as it skips a day where currencies were open, but our markets were closed. Thus, the day-over-day gap move really took two days.
Again, I don't dispute that volatility emanating from the currency market can slosh over to our equities, I just disagree that this is any sort of alarming move yet. It's akin to VIX drifting to 10, then popping back to the mid-teens. Hey, maybe that's happening right now, in which case we're already into the big pop. It would seem volatile on a relative basis, but only because it was so low to begin with.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.