May 19, 2009
The CBOE Volatility Index (VIX) is dropping below 30 intra-day
today, and looks safe at this point to have its first close below 30
since September 12th, 2008. I've mentioned several times since last
Fall that it was not "normal" for a mature economy and stock market
such as the U.S. to have volatility over 40%+. That is the type of
volatility that goes along with emerging markets traditionally --
historically the VIX has ranged between about 10 and 30 since 1990. Of
course, the drop in the markets over the past year was fairly
unprecedented in its steepness and violence.
The following
Weekly VIX Chart shows the extent of the downside movement in implied
volatility. It is basically in freefall mode, where will the VIX
possibly stabilize? At this point, I would estimate in the 20/25 to 30
range ... but 30 is still an important area, and we could end up
bouncing higher from here. The red and blue lines are the 20 and 40
week exponential moving averages and both are around 40 currently, but
downtrending -- they can give an idea of possible "equilibrium" areas
for the VIX. Another point to remember is that Summer is historically
a fairly slow period for volatility, so that may have something to do
with the VIX coming in as warm weather spreads around the country.
VIX Weekly Chart
The market doesn't "seem" less volatile recently, if you look at the
gigantic % moves we have seen on the upside since the March 9th
bottom. However, the following OptionVue
chart shows that Nasdaq 100 historical volatility is around 26% and
implied volatility is around 28%. This is around the 75th percentile
on a historical basis, which shows we are still in the top quarter of
volatility of the past 6 years worth of data ... but actual volatility
is below 30.
NDX Volatility Chart
Bottom Line: 30 may not hold for the VIX, but a continued implosion
beyond the 25 or 20 area is not likely, in my analysis. And the
current plunge does seem to indicate some general complacency, given
that only months ago there was basically rampant pessimism and panic
among economists and analysts.
Moby Waller
Portfolio Manager, Advanced Options Strategies and Index Options Timer
BigTrends.com
1-800-244-8736
