VIX Breaks Below 30, Where To From Here?
May 19, 2009
The CBOE Volatility Index (VIX) is dropping below 30 intra-day today, and looks safe at this point to have its first close below 30 since September 12th, 2008. I've mentioned several times since last Fall that it was not "normal" for a mature economy and stock market such as the U.S. to have volatility over 40%+. That is the type of volatility that goes along with emerging markets traditionally -- historically the VIX has ranged between about 10 and 30 since 1990. Of course, the drop in the markets over the past year was fairly unprecedented in its steepness and violence.
The following Weekly VIX Chart shows the extent of the downside movement in implied volatility. It is basically in freefall mode, where will the VIX possibly stabilize? At this point, I would estimate in the 20/25 to 30 range ... but 30 is still an important area, and we could end up bouncing higher from here. The red and blue lines are the 20 and 40 week exponential moving averages and both are around 40 currently, but downtrending -- they can give an idea of possible "equilibrium" areas for the VIX. Another point to remember is that Summer is historically a fairly slow period for volatility, so that may have something to do with the VIX coming in as warm weather spreads around the country.
VIX Weekly Chart
The market doesn't "seem" less volatile recently, if you look at the gigantic % moves we have seen on the upside since the March 9th bottom. However, the following OptionVue chart shows that Nasdaq 100 historical volatility is around 26% and implied volatility is around 28%. This is around the 75th percentile on a historical basis, which shows we are still in the top quarter of volatility of the past 6 years worth of data ... but actual volatility is below 30.
NDX Volatility Chart
Bottom Line: 30 may not hold for the VIX, but a continued implosion beyond the 25 or 20 area is not likely, in my analysis. And the current plunge does seem to indicate some general complacency, given that only months ago there was basically rampant pessimism and panic among economists and analysts.
Moby Waller
Portfolio Manager, Advanced Options Strategies and Index Options Timer
BigTrends.com
1-800-244-8736
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