From what I can tell, the recent contracted range and simultaneous diminishing volatility can only mean one thing: We’re going to get a large move, soon.
The charts that follow plot the SPY with my four favorite measures of volatility underneath: 30 day Historical Volatility, Bollinger Band Spread, ATR(10), and the $VIX.
Above we see that all measures of volatility are making new lows, except for the Bollinger Band Spread (in purple). The question is, can volatility continue to dissipate? The answer is sure it can (and we’ll see that it has before, in the charts to follow). However, even if volatility does continue to dissipate, it will not do so without a spike. And I believe the spike is coming soon.
Typically, a spike in volatility comes with a market pullback, but we can find instances in the chart above of volatility increasing with price. Depending on your bias, you are likely to believe that this volatility spike will mark a strong breakout, or start a new downtrend. My gut says it will come with a pullback, but I continue to be positioned more long than short.
Our one directional clue from the indicators is that the Bollinger Band Spread is rising. That is because on Tuesday the SPY traded above its upper band. This will cause the bands to widen, and the spread to rise. Of course there is nothing to stop the SPY from trading back down to the lower band, but if it continues to hug the upper band, it seems that when volatility returns, it may bring higher prices.
The 2 year chart above shows that with the exception of the VIX, the other 3 measures of volatility are trading at or near 2 year lows. I just don’t see how volatility can decrease much more without a spike first.
The 4 year chart above shows the last year from a period of extremely low volatility: 2004-2006. From 1998 to 2003, volatility was more elevated, and I’m expecting that our market going forward will have higher volatility, similar to 1998-2003 (see chart below). I see 2004-2006 as a time of depressed and artificially low volatility (and look what it begat!) and I don’t believe that the fundamentals of the economy will allow the market to trade as it did during that period.
And finally we have a 13 year chart. If we examine the last 6 months of volatility, we see how tame it has been, relative to earlier periods.
My prediction was that the SPY would lose 10% in January. I’m expecting the coming volatility spike to bring lower prices, but I may very well be dead wrong. One thing’s for sure, if the market over the last month has lulled you to sleep, it might be time to wake up and start paying attention, again.
I don’t know where else to post this Wood, so I’ll just drop it here. Your referring to Obama as ObaMao in your predictions humored me to no end.
Glad you enjoyed it Mr. Thaler, and thanks for reading them! I hate doing predictions, so I had to had some fun with mine.
Got a new volatility crush big move ahead alert here too. Best, JP
Thanks JP. I’m actually looking forward to it. Hard to make money with no movement!
u should try to figure out if market monks 10k-8mil in 23 days is bs for us… he has killed it in the last 2 ibc stock contests and is a very elusive systems trader…
Feliz Año Nuevo Wood!
One question – how is the December volatility compared to the normal end of the year snoozefests?
Don’t know Cuervo, good question though. I’d say less, since last year we were coming off of Armageddon.
Love the ad – especially the ‘Teach yourself Pascal’ bit.
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