Weekly Update

Volatility at Decade Lows


Published June 9, 2017


A couple of months ago we posted on our blog an article titled “Risk Rises” which talked about the VIX volatility index shooting up almost +50% over a period of a few days. At the time it seemed this sharp jump in market volatility might presage a shift in market tone. However, the jump proved to be a one-day wonder as the blue arrow in Chart 1 below shows. Volatility very quickly dropped to the prior historically low levels.

Chart 1: Volatility index doesn’t hold the spike higher

Volatility index doesn't hold the spike higher

Now, just a few weeks removed from that very brief spike, volatility finds itself even lower. The index has dropped below 10 for the first time in ten years, and only the second time in over 20 years – see blue triangles at the bottom of Chart 2.

Chart 2: Volatility reaches exceptionally low level

Volatility reaches exceptionally low level

Are markets, investors, and economies really so stable and without concern? Or does this signal a coming end to this bullish market tone? Last time volatility dropped so low was right before the financial crisis. While there is nothing to suggest such a dramatic change in markets, we can’t help but expect a coming increase in volatility. The question is when and how much.

Market Update

Investors looked to see if small-cap stocks could continue their prior week outperformance and do some catching up with their large-cap brethren. Small-cap stocks are up +3% for the year to date while the Nasdaq shows a +17% increase with the S&P 500 midway in between. That’s a big gap for the smaller companies to make up. Monday offered little movement in stocks with a +0.1% move amid a tight trading range. Stocks moved cautiously Tuesday to close -0.3% with concerns about the upcoming Congressional testimony of former FBI Director James Comey and the UK election later in the week keeping traders from embracing any further risk. A large build in oil and gasoline inventories pushed crude oil prices down near $45/barrel. That appeared to have little impact on the broad stock market, however, as the release of prepared remarks from Mr. Comey suggested no new surprises from his upcoming testimony. Stocks recouped +0.2% as a result of Wednesday’s trade. The testimony came and went without much new news leaving investors to focus Thursday on the House of Representatives repeal of large chunks of the Dodd-Frank regulations which had limited some banking activities. That repeal supported financial shares and lit a fire under small-cap stocks, which rose +1.4% on a day when the large-cap indexes were flat. Shares of semiconductor leader Nvidia (NVDA) surged +7% on a target price raise from Citigroup. A seeming strong rotation of money in and out of market sectors told the tale of trade Friday. Tech stocks, leaders throughout the year, encountered immense profit-taking while financial and energy shares, which have lagged all year, shot higher. Nvidia gave back all of the prior day’s advance leading the Nasdaq lower by -1.8% while the broad market held flat and small-cap stocks actually gained +0.4% on the day.

This shift in favored sectors showed up in the weekly tally with the S&P 500 (SPY) off -0.31% while the Nasdaq 100 (QQQ) crumbled -2.43%. The Russell 2000 small-cap stock index (IWM) gained +1.26% for the week.

Warm wishes and until next week.