Friday, June 19, 2009

VIX at Seasonal Cycle Low

With the VIX now getting comfortable in the 20s, there has been a fair amount of discussion about just how low we can expect the VIX to go in the next few months.

Back in April, in The New VIX Macro Cycle Picture, I predicted that the VIX will likely not drop below the 25-27 area in the current bull market. That prediction has held up so far, but will almost certainly be tested during the summer months.

Most investors tend to think of the summer season as something of a horse latitudes of sorts for trading, with volume tailing off, portfolio managers on vacation and stocks sometimes set to cruise control. As a result, most people equate summer with lower volatility.

While the VIX does tend to follow a distinct seasonal cycle, the truth of the matter is that we are now at the seasonal cycle low, with volatility historically increasing dramatically from June through October. In fact, over the course of the past two decades the increase in volatility has been highest from June to July, increasing by over 10% (1.82 points.) The pattern is quite distinct in the chart below, which shows composite monthly volatility from January 1990 through last month, using 100 as the series mean.

So…while volatility may indeed trend lower as some of the concerns about the global recession are put to rest in the next few months, lower volatility will have to counter the established seasonal cycle.

For some previous posts on the same subject, try:

[graphic: VIXandMore]

Disclosure: Neutral position in VIX via options at time of writing


Anonymous said...

Hi Bill, may i ask you to explain how you derive this graph ? I guess that you take an average of VIX values at the end of every month over several years.

However, it might be interesting for us if you indicate what is the standard deviation for each of these 12 average values that you get. Especially, if it is small, there's no reason your pattern won't repeat itself year after year.


Anonymous said...

i'm curious to know how the current term structure of the SPY or SPX compares to your seasonal chart. a quick glimpse on my end looks like sep and dec vol is very rich compared to jul vol even when you take the seasonality into it.

Anonymous said...

i meant to say that back months look cheap.

Unknown said...

You truly believe we are in a bull market already? Surprising...

Francisco Lorca-Susino Ph.D, CMT said...

Interesting graph you put up Bill,, if that indeed proves to correct, we ought to increase those VXX positions, although I am not yet convinced that VIX will increase this time.

Damien said...

Great work, Bill! Very valuable for traders.



Anonymous said...

comment on the recent VIX/VXV ratio.

I just found in the last few months, this ratio has given a few false alarms.

In some sense, it tells the recent market is very volitile. I wonder should we add another criteria for sell/buy alarm. e.g after smoothing this ratio, the slope of this ratio should not be greater than certain ratio etc. (i.e. keep in a low value for some time to vertify the signal.)

Would you comment on this thought?



Anonymous said...

Hi Bill, I am Trading Nymph from Stockpickr...Question...Why did the VIX drop like that in the last hour of trading on Friday? With a flat market and USD actually moving up it didn't make much sense....Help????

Anonymous said...

The vix often drops on friday afternoon because the time decay comes out of the S&P 500 options (from which the vix is derived) but that same time decay is real time in the vix calculation. For this same reason, if all things remain the same, the vix should in theory open higher on a monday morning.

Dave Narby said...

It looks like the level of 'fear' (might better be called 'doubt') out there isn't being expressed in the VIX, but rather CDS...


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