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Maybe Volatility Isn’t The Norm?
Have we readjusted our trading mentality to expect volatility? We show two charts in this article to showcase two important historical perspectives. First is the VIX long term chart from the early nineties and highlighting the how many times the volatility index has sustained activity above the 25 point range. Keeping in mind prolonged period periods of time that effect market volatility and perception, we note that we initially isolate VIX above 25 into 5 periods of time (1998, post 9/11, crisis of 2008, mid-2010, and the sell-off in 2011). For the time being in 2014, unless we have a prolonged period of angst or a catalyst that will send traders and investors reeling, the initial VIX pop to 31 was a the equivalent of a key punch error. This is not to belittle the loss of capital that took place recently. We are merely constructing an analysis of the historic VIX pricing.
The second chat we show is the historic SPX going back to the early 1990’s. We highlight the significant pull backs, sell-offs, major events such as post 9/11, and the crisis of 2008. We grouped the 2010 and 2011 sell-off together. When taking the greater view and more macro approach to this analysis, we do see prolonged periods of “somewhat” controlled and measures gains in the overall index. Certainly, one could intimate that the most recent upward trend is the result of numerous QE’s from the FED, balance sheet activity from various central banks, and the lack of Laissez Faire from political entities. We have had quite a bit of “measures steps” taken on behalf of central bankers.
We show these graphics to perhaps prove a different point. The most recent volatility spike, granted for a comparatively short time, indicated a weak spot in the perception of the markets. What is sometimes discussed in the media and in the circles of analysts is this notion of calculable and modeled events.
Granted, the macroeconomic view of late has become a bit maudlin. Central bankers aligning themselves with politicians to quell market concern does promote a bit of anxiety in the market place. Put in perspective, traders, analysts, experienced investors have been through economic downturned many times before 2014. This is a model that has been worked on for many years and is consistently updated and revamped to accommodate new variables and nuances. This is certainly not an attempt to make light of the potential downturn in markets as they react to potential dove tail risks on the horizon.
Do market participants prefer bad news rather than confusing news? Perhaps this is more of a philosophical and psychological question. If news can be quantified and applied to various models consisting of an exorbitant amount of variables, analysts will be able to provide directions to traders and managers. When information is somewhat hazy or could be interpreted in more than a few ways, the result can be nebulous directional peaks and troughs. Perhaps it is more interpretation that fact that moves the markets?
Keeping all this in mind, lets circle back to the this notion of historic volatility. Traders prefer consistency. Maybe the perception of consistency? I am sure that some of our readers will contend this issue by stating that traders enjoy volatile moves on the broader market. The opportunity exists to take advantage of volatile moves because of access to information and various asset classes… perhaps? While this may be true for the larger brokerage firm that monetize jump in trading activity, an increase in volatility does tend to promote some level of anxiety among portfolio and money managers and mutual fund managers.
As market participants and students of the economy and the markets, one does tend to question whether central banker policies are in place to support not just market jitters and price jolts, but the notion that perception of wealth relies heavily on home prices and value of the 401K account. We witnessed a rather severe positive move when the Fed Governor Bullard “commented” that the FED should extend QE. The markets continued their positive trajectory.
Traders that we speak with on a consistent basis certainly are growing a bit weary of this perennial support from the fed and global central bankers. Questions are consistently voiced as to how long can these actions carry through and how big can the preverbal balance sheet grow. Maybe the better question is, what is at stake should the central banker position become more Laissez Faire? Will we see the volatility enter the greater market indices? What is the true value of the bid imposed by the central bankers? Are traders and managers ready to take on a market without the bid granted by the global central banks?
The general market has become quite comfortable and dare we say, “content”, with the level of government intervention in the overall capital market environment. Certainly, we began to see this take shape during the apex of the Economic crisis of 2008.
While looking at historical averages and empirical evidence with respect to market direction and volatility does point to the general perception that “we” prefer more consistent markets. Having said this, one does question the duration of such low volatility. Should we be expecting volatility spikes in the face of active participation by central bankers? Or does this stem from our desire for more “action” from the markets?
Judging by the recent movements in the broader markets, we are still under the spell of the QE type commitments from global central bankers. This no doubt contributes to the complacency and lower volatility of the markets.
Let’s not expect what is historically not the norm.
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How many human participants are there now? Do these robots/algos really fucking care?
"Do market participants prefer bad news rather than confusing news? Perhaps this is more of a philosophical and psychological question."
What drivel!!! Pivotfarm needs to go back to his trading indicator coding....and leave us in peace.
Na, we all need to become farmers so that we can live off of the government subsidy money as well. No main street business gets that kind of backing. If you haven't noticed, most all uber large houses being built or have been built in the last 10 years are Farmer owned, besides keeping Ford and Chevy in business "buying those $50,000 pickups"
The real surprise is the degree to which VIX analogs have been shorted - as indicated in an earlier ZH article. 2.5 times the outstanding volume? WTF? That is where your increased volatiltity of volatility comes from. THat barrel is going to rip a hole in the moon when it slips out of the CB grasp and rips up.
The deeper you try to push a sealed empty barrel down in the ocean, the more violent it's rise back up. This reminds me of when CBs used to interfere with supposedly free-floating currencies. The ultimate correction / reversion to 'true' relative value was violent and went past where it likely would have been without the interference. The increased volatility is simply a reflection of the degree of CB interference in the capital markets. No surprise.
Actually, it just came to me that finance i.e. the business of money is following the same exponential curve that population and technology are on. We have zipped right through the "sweet spot" on the way from steady as she goes to no holds barred. VIX is just one small indicator of this fact.
I suggest that trying to time the collapse of this financial colossus is a fools game. Save enough for a simple life and check out. Your ulcers will thank you for it and TPTB will go out of business when enough people do...
;-D
Young padwan you must go back in history to understand the nature that VOL has been managed by the FED and its proxy consituents. IE before the VIX and VIX futures and other OTC derivatives which were created to make selling VOL more convenient. VOL selling is in the DNA of all major banks and brokers, VOL spikes are the same getting blow out of naked positions.
Peace
Wealth is created by funding of enterprises that threaten existing , inefficient businesses .
Low Vix means your society is failing vis-a-vis competitors .
Learn Chinese.
See
http://andreswhy.blogspot.com/2012/06/wealth-and-fluctuation-andre-wille...
Why would central bankers take away the bid? Nobody cares! They will keep doing it for a long time. Look at Japan.