Are We Watching a Volatility Rerun?

An uptick in volatility is coming, but will it last?

Apr 13, 2015 at 8:59 AM
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Has the volatility "surge" officially run its course? The CBOE Volatility Index (VIX) closed at 12.58 on Friday, the lowest close since Dec. 5, 2014.

Objectively, it's pretty much in line with realized volatility (RV), as 10-day RV on the S&P 500 Index (SPX) is currently in the mid-9s and drifting. Subjectively, it feels about fair given the backdrop. Yes, we have earnings season on tap, but lately we've gone back to the slow-grind-higher days of … well, this time last year.

In fact, we remain very similar to last year overall. The market got a bit jumpy and volatile early in 2014 before settling down in a big way in the second quarter of the year.

What's odd is that we seemed to have stabilized a bit on the kind of punk jobs number that came out on Good Friday, and seemed to confirm the "eh" economy of the first quarter of this year.

Maybe that's not so odd. It sounds pretty lame to make excuses like "the weather artificially altered spending patterns in Q1." But perhaps there's some kernel of truth to it. The lame excuse proved pretty prescient in 2014, as a generally lousy weather stretch led to the appearance of a sinking economy, only to see it all "even out" a bit in the second quarter. Well, the weather was even worse this winter in most of the country, so is it possible we see a rerun?

It's not at all my field to predict stuff like that. I'm just guessing that's part of why the market's seemed to have gotten much more stable in the face of ostensibly bad and backwards-looking numbers.

As for the rest of the VIX Industrial Complex, well, VIX futures still believe in the coming vol blast! Check out this chart:

VIX Futures Term Structure

And, yes, we will see a vol blast at some point before November. The bigger question as it pertains to VIX futures is whether the blast persists. They generally don't, but at some point they will.

In a related story, I've typed that sentence above 100 times or so in the last few years. We're close to due for a high-volatility regime. I doubt it starts this week. But I do bet that hindsight will say we started creeping toward high VIX in 2015. The mean VIX this year is 16.33, which compares favorably to the mean VIX of 14.17 in 2014.

So we have that going for us. Which is nice.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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