Market Myopia

As investors, we necessarily rely on history.  How we analyse that history is particular to each investor – some will look for technical patterns, some at fundamental data, still others will build quantitative models.  But all of us need data, and history is our only source.

We may have to rely on history; we don’t have to fall prey to what the behavioural economists would call “recency bias.”  Indeed, taking a longer-term view can provide invaluable perspective.  Two popular views of the current environment provide a specific example:

  • Unprecedented levels of low volatility driven by central bank stimulus in the past two years have caused the market to become complacent; valuations are proof positive of a stock market bubble.
  • Moreover, when the bubble “pops”, the modern market of leveraged derivatives, high frequency trading and globalized capital has engendered a greater risk of systemic volatility and, when things get interesting they are going to get very interesting, very fast.

A running thread in both theories is the “risk on/risk off” dynamic.  We are now either in utter turmoil or dulcet calm, each exaggerated by the rapid and capricious response of a highly mobile and sophisticated investment community.

An examination of recent history would appear to support these claims.  It certainly looks like a new, more volatile dynamic since the beginning of the financial crisis.  And as we all know, volatility has registered remarkably low levels more recently.  Are we set to continue in a bar-belled digital age of all volatility, or none?


Now, there is a good reason why the chart above begins in 1990.  The VIX data begin then; we don’t know what the VIX would have been during the “black Monday” crash of 1987 (although there are clues, they suggest the answer is higher than at any point subsequently).  Nor do we have any idea of the appropriate level of implied volatility during the “Knickerbocker Crisis” of 1907.

However, what we do have – in the Dow Jones Industrial Average – is a market bellwether with a remarkably comprehensive history.  Here is 118 years of realized monthly volatility in the DJIA:

Pic 2

Clearly, long periods of low volatility are not unusual.  Whatever else may have been occurring in the 1960’s – and despite a war and an assassinated president – there wasn’t much turmoil in U.S. blue chips.  Extended periods of both high and low volatility have been a part of the market since it was invented.

Moreover, viewed in this longer perspective, the past decade appears thoroughly ordinary.  A bit less volatile than average recently, a bit more volatile than average during the 2000s.  But, in the grand scheme of things, it is business as usual.

Pic 3The phrase “it’s different this time”, uttered by a financial professional, typically provides grounds for mockery.  Sometimes it’s true.  But if you don’t take the long view, it’s hard to see whether this time is actually different at all.


Last Week in VIX – 9/7/2014

A general takeaway from the CBOE RMC Europe conference last week is that the stock market seems ready for some sort of correction. You would not get that sense by looking at VIX and seeing a 12 (or lower) closing handle for every day over the past three weeks. However, looking at things in context, […]

Last Week in Russell 2000 and Nasdaq-100 Volatility – 9/7/2014

The Russell 2000 continues to lag the Nasdaq-100 and S&P 500 in 2014. RUT was down slightly on the week while NDX and SPX were both higher. For the year RUT is up just over 0.5% while the other two broad based indexes with tradable volatility markets are up 13.86% and 8.62% respectively. The result […]

Last Week in Short-Term Volatility – 9/7/2014

VXST moved up a little on Monday, as it always does after a long weekend and worked higher into Friday’s employment report on Friday. Note that on Friday, with the S&P 500 under a little pressure, VXST actually opened lower. We are still getting a feel for how VXST acts around big economic numbers and […]

Last Week in Gold and Oil Volatility – 9/7/2014

Oil futures finished the week closer to 90.00 than 100.00.   This continues to perplex me as the demand for energy seems to continue to increase while the supply side of the equation has the potential to be impacted by a gamut of potential issues. OVX moved up on the week, mostly in the early part […]

Last Week in Emerging Market Volatility – 9/7/2014

This past week I was lucky enough to get to participate in CBOE’s Risk Management Conference just outside of Dublin, Ireland. There was one session where the presenter asked for members of the audience to raise their hands if they feel the emerging market sector is a safe place to get equity exposure these days. […]

Last Week in Volatility Indexes and ETPs – 9/7/2014

The S&P 500 pulled out a gain for the week through shaking off what was called a bad employment report this past Friday. VXST and VIX rose as well for the week while the longer dated volatility indexes were down slightly. We have to attribute some of the VXST and VIX gains to rebounding from […]

Extended Trading Hours Volume at Record High So Far This Month – By Matt Moran

CBOE will host the 3rd Annual Risk Management Conference Europe on September 3 – 5 at the beautiful Powerscourt Hotel in Ireland. I anticipate that one of the main topics at the conference will be – how can investors manage risk around the clock, especially during non-US trading hours? CBOE has positive developments to report […]

VIX Last Week – 8/24/2014

VIX finished the week down almost 13% at 11.47. This closing price was only 0.17 higher than the 2014 low of 11.30. Do keep in mind that the 11.30 deserves some sort of asterisk as it came Thursday before the 3 ½ day Independence Day holiday. If the S&P 500 moves up this coming week […]

Gold and Oil Volatility Last Week – 8/24/2014

The SPDR Gold Shares ETF (GLD – 123.19) dropped about 2% last week, but stayed in the mid-120’s range that we have become accustomed to, although at the lower end of the range. GVZ moved up a tad, but with a 13 handle the direction does not mean as much as the level. The level […]


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