Is Historically Low Volatility About To Surge?

Tyler Durden's picture

Authored by Dmitri Speck via,

Suspicion Asleep

You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?


All quiet on the VIX front… what can possibly happen? [PT] – click to enlarge.


When such questions regarding future market trends arise, it is often worthwhile to examine market history.

For the purpose of analyzing volatility I have used one of the longest time series available, namely the Dow Jones Industrial Average (DJIA) from 1915 onward – which represents more than a century of price history. In order to improve comparability, I have removed Saturdays, which used to be trading days in the distant past. I have calculated historical volatility as rolling and overlapping time periods of 21 trading days (equal to approximately one calendar month).


By the Standards of the Past 100 Years Volatility is Extremely Low

On August 7 volatility measured in this way had declined to just 3.99 percent, which is a very low level indeed. By way of comparison, over the entire period of 25,734 days, volatility amounted to 15.05 percent on average!

However, this isn’t the first time it stood below the level of 4 percent. Occasionally this has already happened in the past as well, for instance in 1944, 1964/65, 2011/12 and 2014.

The chart below shows the rolling 21-day volatility of the DJIA since 1915:


Dow Jones Industrial Average, 21-day volatility, 1915 to 2017. Volatility is currently extremely low.


Volatility Can Easily Reach Much Higher Levels

Levels of volatility as low as they are currently nevertheless are very rare occurrences. Over the past century levels below 4 percent were recorded in just 0.17% of all cases. Conversely, the upside potential is considerable. To merely revert to the long-term mean of 15.05 percent would require more than a tripling from current levels.

However, historical peak levels in volatility were much higher than the average: thus in 2.99 percent of all cases volatility reached levels above 50 percent, and in 0.1 percents of all cases it even exceeded 100 percent!

The next chart illustrates the distribution of 21-day volatility levels of four percent and higher in the DJIA from 1915 to 2017 in one percentage point increments.


Dow Jones Industrial Average, volatility distribution, 1915 to 2017. There is substantial potential for volatility to expand – click to enlarge.


Once again it can be seen quite clearly how extraordinarily low 21-day volatility levels below 4 percent are.


Volatility in the Course of the Year

When should a surge in volatility be expected though? In order to find this out, we will examine the seasonal pattern. The next chart shows the seasonal trends in the 21-day volatility of the DJIA over the entire time period under investigation from 1915 onward.

Note: While in the first chart above I have marked out the level of volatility at the end of the respective 21-day rolling time periods (as is usual practice), I have marked them out in the middle of the respective time periods in the chart below, as this shows the seasonal pattern more clearly.


Volatility of the Dow Jones Industrial Average, seasonal pattern, 1915 to 2017. Apeak in price volatility is typically reached in October


Despite the very long time period under examination with its multitude of data points, there evidently exists a very distinct seasonal pattern in stock market volatility.

In July the proverbial summer doldrums can be observed, with volatility levels averaging less than 14 percent. Thereafter volatility typically increases to a peak of almost 19 percent in October.


Low volatility is not going to persist forever!

Many investors are currently betting on a further decline in volatility. In view of its already very low level and the negligible additional downside potential it offers relative to the substantial upside potential, this is probably not the best idea ever. Moreover, as shown above, October is the month in which volatility typically reaches a seasonal peak. Taking both of these facts into account, it seems far more sensible to expect an expansion in volatility.


That dreaded moment when it suddenly becomes too quiet… [PT]


PS: it is probably the calm before the storm!

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Bill of Rights's picture

Research the 68 democrat convention folks . It's the same play book rehashed.

Raffie's picture

No, keep buying till the VIX hits 50 then sell....

Trust me on this.............

SafelyGraze's picture

in other news ..

LeBron issued a harsh rebuke Tuesday of Donald Trump

"Athletes like myself are in favor of being owned. Our masters decide who we play for. When we play. What we wear. They are good to us. They trade us for the good of the team. They are loving and beneficent."

The Cooler King's picture

Only if Gartman is "balls deep" short volatility with the only ball he has left as collateral.


After that, he's gonna have to start using McAfee's dick on margin & hope that 'margin call' doesn't materialize

Honey-Badger's picture


The VIX is rigged like everything else, you want proof look at election night!

Snaffew's picture

rigging goes both ways...always has.  When enough peeps are convinced that selling volatility is the only game in town, that is when it explodes.  it seems we are at or very near that point now.  They condition the masses to a point of complacency and ease---then they pull the rug out from under their feet.  Don't you ever see the game for what it is?

GUS100CORRINA's picture


Sorry, LeBron James is a person lacking in CHARACTER, CONVERSATION and CONDUCT!!

trgfunds's picture

That is just what they are counting on. Your time decay will erode your position to zero. The racket is in SELLING volatility, not buying it. Become an insurance salesman, not an insurance buyer.  

Raffie's picture

I'm also guy going door to door selling Volcano Insurance to people who live on house boats.

GUS100CORRINA's picture

Is Historically Low Volatility About To Surge?

My response: HELL YES!!!! Why? Because the US LEADERS in both the government and business continue to attack the POTUS for no good reason. These leaders appear to have selective hearing.

The heavenly realm is not very pleased with the 'GOINGS ON' on this PUNY PLANET called EARTH.

On the other hand, the DEMONIC realm could not be HAPPIER!!

Spiritual warfare on steroids.

NugginFuts's picture

Short answer: NO.

CJgipper's picture

I predict that it goes down further.  

English herbsman's picture

Regardless of which way it goes, The Rothschilds House still always wins. 

Hkan's picture

Cant help feeling a bit happy about it.....who's bad?

Bernie Madolf's picture

Looking at Vix historically is about as useful as looking for astrological signs in my morning dump.

Snaffew's picture

slv/silver rallying hard after yesterday's dump.  Pretty good indicator that the markets are setting up for a fall imo.

cn13's picture

The funds have never been shorter the VIX index.  Time to fade.  It can't go to zero.

Last of the Middle Class's picture

Explain to me exactly how QE has NOT suppressed volatility over the last 10 years.

FederalReserveBankofTerror's picture

Vol up tomorrow as VIX slam subsides, VOL contracts expired and  options ex already sold to close and Interactive Brokers clients dash for cash to cover tighter margin requirements that go into effect on Saturday. Other brokers to follow. He who sells first sells best! BTFD FOREVER!

allamerican's picture

crappy close, hedged.


the vix, yep..

marunovich's picture

Make sense. I've heard experts' opinions that volatility to begin lessening and for gold to appear almost comatose during the last several weeks immediately prior to either a breakdown or breakout in August- October timeframe. This article explains it pretty clear.