Death of Volatility

Saturday, December 31, 2005 | 08:58 AM

Light posting this weekend, but I came across two fascinating VIX graphs that demanded discussion.

The VIX, for those of you who may not be aware, is a function of option trading that deduces the "implied volatility" in the markets. 

The first graph is from BCA Research, and it shows the VIX over the past 15 years:

Vix_

Courtesy of BCA Research

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I read this as the VIX -- eventually -- becoming an attractive buy; I envision this scenario: the VIX spikes up to 13-14, before it runs into technical resistance; then as the market makes one last move upwards, it slides under 10. To me, the ideal entry point would be towards 8-9.

Those interested in seeing how the VIX trades should look at either the options (VRO) or futures (VBI).

Floyd Norris wonders if its due to "an excess of capital that feels it has nowhere to go but stocks. Individual stocks can still soar or collapse based on good news or bad, but money taken from one stock seems to flow to another, cushioning the daily movement of market indexes."

In today's NYT, he writes:

"Back around the turn of the century, it seemed as if nearly every other day was an exciting one in the stock market, and not just in the United States.

At the peak of volatility in the United States, from 2000 to 2002, the Standard & Poor's 500 showed a daily gain or loss of at least 1 percent for two days a week or more. And it was far from the most volatile market. In Germany in 2002, the average week had three big days.

But volatility began to dip in 2003, fell sharply in 2004 and absolutely tumbled in 2005. In the United States, there were 52 days in 2002 when the index showed a move of 2 percent or more - an average of one a week. That fell to 15, little better than one a month, in 2003. And there has not been one such day in the last two years.

The accompanying charts show that in Britain, Germany, France, Japan, Hong Kong and the United States, the amount of stock market volatility in 2005 was at the lowest level since at least 1996."

The chart included covers many of the major indices in the world:

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click for larger graphic

Nyt_vix_20051231_charts

Courtesy of NYT




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Sources:
The Year Of Living Complacently
BCA Research, 09:54:00, December 20, 2005
http://www.bcaresearch.com/public/story.asp?pre=PRE-20051220.GIF

Don't Hold Your Breath for an Exciting Day in the Stock Market
FLOYD NORRIS, Off the Charts
NYT, December 31, 2005
http://www.nytimes.com/2005/12/31/business/31charts.html

Major World Index VIX graphic
http://www.nytimes.com/imagepages/2005/12/31/business/20051231_CHARTS_GRAPHIC.html

Saturday, December 31, 2005 | 08:58 AM | Permalink | Comments (17) | TrackBack (1)
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» Equity markets: Low volatility cannot last from New Economist
In late December BCA Research published a short piece, The Year of Living Complacently, which highlighted the very low equity market volatility in 2005:The growing influence of hedge funds, abundant liquidity, robust corporate health and low inflation ... [Read More]

Tracked on Jan 2, 2006 9:20:50 PM

Comments

"To me, the ideal entry point would be towards 8-9".

Do you think it will go that low before turning up? Maybe?, and I hope you're right. Friday I bought CALLS

The VIX is one of three indicators I watch. As of late it has a tendency to fill gaps within three days. Monday would be the third day. I do expect this pattern to change soon...so far so good.

I have a strong feeling we will retest the highs again, but i'm not betting on it yet. I wait for setups, clusters and breakouts.

Posted by: Tonythetiger | Dec 31, 2005 12:04:33 PM

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