Stocks quoted in this article:
Well, it's a December to Remember so far in the market, especially if you were rooting for a decline. We're down five days in a row, albeit the dip is only about 1% total in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
But it wasn't always thus. Russell Rhoads had this on the CBOE site:
Monday morning while getting ready for work I overhead the comment, "the S&P 500 has not had a losing December since 2007." This comment was interesting to me because I would have assumed either 2008 or 2012 would have been down years for the stock market in December. In the case of 2008 I assumed the market was down in December just because it was 2008. This time last year we almost went over the fiscal cliff so I thought that December would have been a losing month. Well I was wrong on both accounts. The last year the S&P 500 was lower in December was in fact 2007.
As his table shows, we are indeed up every December since 2007. And as he shows later, the CBOE Volatility Index (INDEXCBOE:VIX) had dipped every December until last year's Fiscal Cliff Freakout.
All of which got me thinking. Do we have much volatility seasonality any more? I ran a lot of numbers on the topic for my book, but I wrote it in 2008-2009. It's a different options world nowadays. There's an expiration every week now, so the action that was once concentrated around the third Friday of each month has diffused to the whole cycle. Not to mention VIX options and VIX futures and VIX ETN trading has gotten so popular that there's almost a tail-wagging-the-dog effect. A move might start in a VIX call and then cause ripples in an S&P 500 Index (SPX) option, which would then move the VIX itself.
So without further ado, here's the monthly mean and median readings in VIX going back to December 2008 (and not including this December). I used a calendar month as opposed to an expiration cycle.
And if you guessed that over the past five years that December saw the highest mean and median VIX, congrats! I would have lost that bet.
But alas, there's an explanation. It's a very small sample size -- we're only talking five Decembers' worth of data. And one of those Decembers was in 2008. The market was indeed rallying that month, and VIX was dipping, but it was dipping off ginormous levels. The average VIX in December 2008 was 52.41. The average VIX of Decembers 2009-2012 is 20.29, and the median is 19.71. So simply not including 2008 would turn December from the most volatile month to the least volatile month. And that's despite the pop last year.
Of course I could pull this same trick and lop off January 2009, and lo and behold, the average January VIX dips to 17.84. So long story short, I'm fairly certain I can play with end points and conclude whatever I want about VIX seasonality if I only run small data sets.
The most common December pattern for the market is "meh" early in the month, with a strong close later in the month. The VIX tends to do the reverse, with some news-related VIX strength like we saw last year more of the exception. This year feels like the standard pattern will hold. We'll stay a bit heavy in the market until the Fed in a couple weeks, then VIX will likely drift once the news is out and the holiday cheer sets in.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.