If you fell asleep last month, and then just woke up this morning, you wouldn’t notice much of a difference in the broad stock market.
The S&P 500 started the morning of April 13 at about 2670. The index closed just under that level last Friday. So, there hasn’t been much movement.
But there has been a whole bunch of volatility.
Over the past month, the S&P 500 has traded as high as 2708 and as low as 2604. That’s a 104-point trading range—or about 4%—in just a month.
Let that sink in for a minute. What a difference between this year and last year.
In 2017, the market suffered from record-low volatility. I can’t count the number of times I commented on the ridiculously small daily trading ranges in the S&P 500. In a market with millions of participants, and trillions of dollars at work, it seemed outrageous—to me at least—that the average intraday move in the stock market was less than 0.4%.
Of course, that’s certainly not the case so far in 2018. Ever since the market peaked in January, we’ve seen huge intraday moves in the S&P 500. It’s not uncommon anymore to see swings of more than 2% between the daily highs and lows.
That’s a dramatic increase in volatility. And it’s here to stay for a while.
Low levels of volatility are always followed by higher levels of volatility. We had low volatility for almost all of 2017. So, I expect we’ll see high volatility for almost all of this year.
Take a look at this long-term chart of the Volatility Index (VIX) (Wall Street’s so-called fear gauge) from way back, starting in 2005…
From 2005 through about mid-2007, the VIX traded at low levels—between about 10 and 16. Yes, there were a couple of times in that period when the VIX spiked sharply higher. But it was temporary. The VIX quickly fell back into its depressed range.
Notice, though, that starting in mid-2007, the VIX spiked higher, and it sustained that higher level for the next two and a half years.
In other words, the period of low volatility that lasted for two-and-a-half years from 2005 until mid-2007… was followed by a period of high volatility that also lasted for two-and-a-half years.
Here’s a more recent chart of the VIX…
The VIX spent 14 months trading in a depressed range between 9 and 16. In February, the VIX spiked sharply higher, and it has sustained a higher level. This new period of higher volatility ought to last at least as long as the previous period of low volatility.
So, get used to larger moves in the stock market. This condition is going to last for a while.
Best regards and good trading,
Editor, Delta Report