Volatility Takes a Holiday

It's Summer Vacation for the VIX. How much lower can it go?

The VIX index is frequently referenced in financial circles and media outlets and is commonly thought of as the “fear gauge.” It is officially known as the Chicago Board Options Exchange Volatility Index and tracks the 30-day implied volatility of the S&P 500 Index. This forward looking statistic is used to measure market risk. A normalized level for the VIX index is generally around 20. Above this indicator tends to be a reflection of higher volatility while levels below this refer to lower volatility. To put this in perspective, during the financial crisis of 2008 the VIX shot up to 80 and did not return back to normalized levels until the end of 2009.

The reason this is so important is that market volatility is a huge factor when looking at the role that emotion plays with respect to investing behavior. The VIX is now trading at historic lows. In fact, the VIX has closed below a level of 10, a total of just 21 times in the past 20 years through July 31, 2017. Of the 21 times, 17 instances occurred throughout May, June and July of this year! On Thursday, July 27, 2017, the VIX closed at 9.36, just above the all-time low of 9.31 that was set on December 22, 1993, but managed to hit an all-time intraday low of 8.84 a day earlier.

When looking at the big picture, there have been 17 pullbacks of 5% or more in the S&P 500 Index since the lows of March 9, 2009, yet we have not seen a pullback of 5% since the drop in the market in the aftermath of the Brexit vote in June 2016. This means that this is the longest we have gone without a 5% pullback in over 20 years and the VIX continues to show historically low volatility.

 VIX Closing Below 10 - Last 20 Years


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