Technically Speaking: Volatility & The Bond Bull Market

 

Bond-Bull-Market-Volatility

 

Last week, I covered the extremely low levels of volatility in the market and the building potential for a snap back reversal which would likely coincide with a decline in the market. To wit:

“The level of ‘complacency’ in the market has simply gotten to an extreme that rarely lasts long.

The chart below is the comparison of the S&P 500 to the Volatility Index. As you will note, when the momentum of the VIX has reached current levels, the market has generally stalled out, as we are witnessing now, followed by a more corrective action as volatility increases.”

VIX-SP500-082316

 

“More to this point, the chart below shows the S&P 500 as compared to the level of volatility as represented by the 6-month average of the Volatility Index (VIX). I have provided three different bands showing levels of investor sentiment as it relates to volatility. Not surprisingly, as markets ping new highs, volatility is headed towards new lows.”

SP500-VIX-081616

 

“In my opinion, there seems to be a higher than normal probability that volatility will take a turn higher sooner rather than later. As such as I have added a net long position in portfolio betting on a rise to hedge against the coincident decline in my net long equity holdings at the current time. 

For my, the question really isn’t ‘IF’ it will happen, but simply ‘WHEN.'” 

Since then, there have been a plethora of articles written on the extremely low volatility levels with various explanations as to the causes. As James Mackintosh just penned for the WSJ:

Excuses can be made for the low level of the VIX, too. The implied volatility measured by the VIX should offer a premium to realized volatility, a reward for the risk taken by option sellers. Excessive complacency should show up in a shrinking risk premium, but at the moment, the gap between the VIX and realized volatility is roughly in the middle of its range from the past 20 years.

The same is true for the gap between implied volatility of the next few months and further ahead. Investors seem to think volatility will pick up a bit, and again the oddity is where it stands now, not what investors are doing.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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