In my chart of the week posts I have been striving for more of a generalist theme, with only occasional excursions into the land of volatility. I am making an exception this week, because for the first time in five months the historical volatility of the S&P 500 index (SPX) as measured by 10 day, 20 day, 30 day and 50 day look back periods is less than 40 in all four instances.
In the chart below, I have elected to show the fluctuations in the volatility of the SPX over the course of the past eight months as reflected in two Bollinger bands ranges. The outer range (gray) is the standard 20 day, 2 standard deviations measure. The inner range (blue) covers 20 days but only one standard deviation. The contraction of the Bollinger bands since the beginning of December and particularly in the first two weeks of February shows how volatility has been declining dramatically, notwithstanding the mid-January spike in the VIX. In fact, at current levels, the Bollinger bands are now as narrow as they have been since the week of the Lehman Brothers bankruptcy.
Given current trends, I would expect to see the VIX to be back in the 30s before the end of the month, with a VIX below 35 more likely than a VIX above 50.
Note: Those with an interest in learning more about Bollinger bands and/or customizing the settings on these indicators may wish to check out a series of posts from last June:
- Bollinger Bands: Why 20 Days?
- Bollinger Bands and the Standard Deviation Setting
- Bollinger Bands and the Percent B Setting