One of the subject that’s come up in market discussion of late is the low level of the VIX, the so-called “fear index”. It has reached its lowest levels since back in the early days of the Financial Crisis in 2007. The chart below shows how the VIX has moved up and down since 1992.
The question which comes to my mind is whether we’re seeing a pattern similar to the one following the 1998-2003 period of elevated VIX value where the index retraces back to a lower level for a while as it did in the middle 1990s. The action in the markets in the early 2000s and the likes of Enron knocked a lot of individual investors out of stocks, just as recent developments have done. That makes a case for a similar kind of shift in volatility.
Just for the sake of comparison, I think it’s worth looking at volatility in other ways as well to see how things are playing out. The chart below shows the S&P 500 over the same time frame as the VIX chart. The two subplots show the relative width of the monthly Bollinger Bands (BWI) and a normalized 14-month reading of Average True Range (N-ATR). These give us a reading on how much movement there is in monthly closing prices and how wide the monthly ranges are respectively.
It is interesting to note that the Bollingers are back to being nearly as narrow as they were in the middle 2000s after working back from getting very wide back in 2009. As with the VIX, there is still some room to work lower to match prior lows, but we’re back into roughly the same range.
The N-ADR reading is a different story, though. In this case we’re nowhere near back to the lows of the middle 2000s and middle 1990s. In fact, N-ADR has been rising the last year! This tells us that while price changes from month to month may be getting smaller, the inter-month volatility remains elevated. Could this be a tip-off?
As a technical analyst I have a major concern with the way the S&P 500 made a lower low on the monthly chart back in 2009. That’s a big negative. Add to that the fact that momentum in the rally since then has backed off, as indicated by the lessening beats of prior highs for recent new highs, and you get reason for concern. If the market cannot overcome the 2007 highs on this rally, we could be in for quite a bit of a tumble. And when stocks tumble, volatility tends to rise quite dramatically. Generally speaking, before the top is put in the N-ATR reading is already on the rise. We’re seeing that now, so it’s definitely worth keeping that in mind, though given that we’re looking at monthly charts here, it may be a while yet before any sort of roll-over takes place.