The S&P Just Did This for the First Time in Almost 50 Years

A look back at extremely low historical volatility readings for the S&P 500 Index

Andrea Kramer
Oct 18, 2017 at 1:41 PM
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One must go back to Oct. 4, 1968, to experience a market environment where the 30-day historical volatility (HV) of the stock market was lower than it is now, according to Schaeffer's Quantitative Analyst Chris Prybal. Could this be the calm before the storm for the S&P 500 Index (SPX)? Here's what to expect from the SPX going forward, if past is prologue.

SPX Historical Volatility Falls Below 5

Although the 1960s were a rather tumultuous time socially and politically, there were a few stretches of quiet gains in the stock market, going by the number of times the SPX's 30-day HV fell below 5: in history, 20 times, and 18 of them in the 1960s.

On Monday, the 30-day HV of the SPX fell all the way to 4.377 -- the first reading below 5.0 in 49 years. For context, the S&P closed that day in 1968 at 103.71, and it was the lone signal of 1968. There was also just one signal in 1957 -- the first ever -- as well as in 1962, 1966, and 1967, according to Prybal. Most of the signals happened between 1963 and 1965, as the S&P was grinding higher.

SPX 1957 to 1970


SPX after very low 30-day historical volatility

The Calm Before the Storm?

"While many see low HVs or implied volatility readings as the 'calm before the storm,' in only three of 19 instances was that the case," notes Schaeffer's Senior V.P. of Research Todd Salamone. Those "storms," wherein the SPX was notably lower six months out, followed the first and second signals, in 1957 and 1962, and the signal in 1966 -- just 16% of instances.

"The other thing that hit me is that in five of 16 cases, the SPX rose by more than 4% in the three months following a 30-day HV reading below 5," Salamone added. In fact, the SPX was positive at the three-month marker 68% of the time. Only at the one-month point after 30-day HVs breach 5 did the SPX have a win rate under 50%.

SPX after HV drops vs anytime since 1928


Still, compared to its anytime performance since 1928, the stock market barometer tends to run a bit lackluster after these HV signals. For instance, four months after a breach of 5 for SPX 30-day HVs, the index was flat, on average, compared to a 2.5% anytime four-month average gain. And the S&P was up 1%, on average, six months after a signal, compared to an average anytime six-month return of 3.7%.

As Salamone concludes, "It's probably one of those signals where, based on history, the probability of a 10% pullback is more than normal -- but it's still pretty low." For traders concerned about a possible correction in the stock market, there are several ways to use options to hedge your portfolio.

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