Expecting A Bounce In Volatility

The S&P 500 has rallied over 10% since the February low, push the index up to its 50-week Moving Average. Meanwhile the Volatility Index ($VIX) has declined approx. 47%, sending the ‘fear index’ to its lowest level so far this year.

One way to use Moving Averages besides in terms of trend identification and areas of support and resistance is measuring how far a security or market is from its specified average price. Currently the $VIX is the furthest it’s been from its 50-day MA since the prior lower high in the S&P 500 back in October 2015. As the chart below shows, it’s now more than one standard deviation below the mean based on the distance Volatility historically travels away from its 50-day.

Previous instances of the VIX falling this quickly has led to tough market conditions in the short-term for equities. As I mentioned on Twitter yesterday, the $VIX is also near its 200-week Moving Average, which has been an important level in the past. Steve Deppe also shared on Twitter that when the VIX that since 1990 when the index’s 20-day return is less than -30%, the average forward return for the S&P 500 over the next 5, 10, 20, and 40 days has been negative.

It’s important to remember that there are two ways that Volatility can correct it’s current stretched condition – time and price. We could see VIX move sideways and remain near 15, allowing its 50-day MA to ‘catch up’ or we could see a bounce sending Volatility higher. We obviously can’t know which option will occur, but it does seem that some form of mean-reversion needs to occur – whether it be via time or a large price movement.

sp500-vs-vix-50d-rsma-params-5y-red-x-x

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Are We About to See An Increase in Volatility?

One of the many tools in technical analysis are Bollinger Bands, which measure a set standard deviation price has traveled from a defined Simple Moving Average, in a way it’s measuring the volatility of a price move. Many traders often use Bollinger Bands as levels of potential support and/or resistance. However, I’m much more concerned with the distance between the bands themselves. Which, when applied to the Volatility Index, is showing signs of a potential rise in the $VIX.

When the upper and lower Bollinger Bands compress, it’s a result of a lack of change as measured by standard deviation, in this case, over the last 20 trading days. History has shown us that when this compression in the width of the Bollinger Bands for Volatility gets low enough, it has preceded spikes. Below is a chart of the $VIX over the last three years, with the width of the Bollinger Bands shown in the top panel. I’ve put blue dots on the VIX when the width has fallen below 20. While the $VIX hasn’t spiked immediately following every instance of this occurring, many large moves in volatility have followed such a compression in the Bands.

VIX

To shine a little more light on this topic, below is a list of times we’ve seen the bands width fall below 20 for the first time in two weeks and the $VIX itself was below 25. While the percentage of the time volatility was higher the next 1, 2, 3, 5, 10, 15, and 20 days ranges from 43% to 65%, what stands out to me is the minimum and maximum changes. Typically the minimum move over the shown periods of time is less than 10%, the maximum advances in volatility have been quite large – the mid-double digits.

Even though the number of instances the $VIX has risen has been low (typically less than 50% depending on the time period), when it does go higher we have seen some very strong moves to the upside in volatility. With the width of the bands now sitting under 20, it’s possible we see volatility pick up over the coming two weeks, if not sooner.

Understanding the probabilities and potential outcomes of historical market data is an important tool to being a successful trader.

VIX compression table

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

One Of The Largest Single Day Advances in Volatility History

Yesterday was full of news out of Greece and whether the country could pay its debts while its citizens lined up to take a small maximum amount out of their checking accounts. As far as the equity market was concerned, the world was crashing! At least that’s what you would have thought by seeing how far the Volatility Index ($VIX) had risen.

On Twitter last week I mentioned that the way price and certain pieces of price-related data/indicators were acting, it seemed like we were setting up for a rise . Since then the $VIX has spiked over 55%.

In fact, this was the 11th largest rise in Volatility in 20 years! Only twice during the 2008 Financial Crisis did we see the $VIX advance by a greater amount in a single day. We finished up trading on Monday with the ‘fear index’ up nearly 40%. I’ve been discussing the decline breadth and momentum on both the blog and on Twitter, the number of stocks rising just hasn’t been able to keep up with the overall index. When this type of thing happens, a spark of international drama can be the needle that breaks the equity camel’s back, at least in the short-term, sending fear soaring like we did today.

So when were the most recent times this measure of trader concern rose at such a fast pace? 2011 and 2013. From those large pops in the the $VIX we saw Volatility mean-revert, falling 70% and 30%, respectively over the next days/weeks. I’m not calling for an immediate decline in Volatility, but historically it does tend to lose steam after such a strong rally, we’ll see if this time is any different.

VIX

 Full Disclosure: Certain client accounts may have positions in Volatility-related ETPs upon the time of this writing

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.