Suspicion Asleep

You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?

 

All quiet on the VIX front… what can possibly happen? [PT] – click to enlarge.

 

When such questions regarding future market trends arise, it is often worthwhile to examine market history.

For the purpose of analyzing volatility I have used one of the longest time series available, namely the Dow Jones Industrial Average (DJIA) from 1915 onward – which represents more than a century of price history. In order to improve comparability, I have removed Saturdays, which used to be trading days in the distant past. I have calculated historical volatility as rolling and overlapping time periods of 21 trading days (equal to approximately one calendar month).

 

By the Standards of the Past 100 Years Volatility is Extremely Low

On August 7 volatility measured in this way had declined to just 3.99 percent, which is a very low level indeed. By way of comparison, over the entire period of 25,734 days, volatility amounted to 15.05 percent on average!

However, this isn’t the first time it stood below the level of 4 percent. Occasionally this has already happened in the past as well, for instance in 1944, 1964/65, 2011/12 and 2014.

The chart below shows the rolling 21-day volatility of the DJIA since 1915:

 

Dow Jones Industrial Average, 21-day volatility, 1915 to 2017. Volatility is currently extremely low.

 

Volatility Can Easily Reach Much Higher Levels

Levels of volatility as low as they are currently nevertheless are very rare occurrences. Over the past century levels below 4 percent were recorded in just 0.17% of all cases. Conversely, the upside potential is considerable. To merely revert to the long-term mean of 15.05 percent would require more than a tripling from current levels.

However, historical peak levels in volatility were much higher than the average: thus in 2.99 percent of all cases volatility reached levels above 50 percent, and in 0.1 percents of all cases it even exceeded 100 percent!

The next chart illustrates the distribution of 21-day volatility levels of four percent and higher in the DJIA from 1915 to 2017 in one percentage point increments.

 

Dow Jones Industrial Average, volatility distribution, 1915 to 2017. There is substantial potential for volatility to expand – click to enlarge.

 

Once again it can be seen quite clearly how extraordinarily low 21-day volatility levels below 4 percent are.

 

Volatility in the Course of the Year

When should a surge in volatility be expected though? In order to find this out, we will examine the seasonal pattern. The next chart shows the seasonal trends in the 21-day volatility of the DJIA over the entire time period under investigation from 1915 onward.

Note: While in the first chart above I have marked out the level of volatility at the end of the respective 21-day rolling time periods (as is usual practice), I have marked them out in the middle of the respective time periods in the chart below, as this shows the seasonal pattern more clearly.

 

Volatility of the Dow Jones Industrial Average, seasonal pattern, 1915 to 2017. Apeak in price volatility is typically reached in October

 

Despite the very long time period under examination with its multitude of data points, there evidently exists a very distinct seasonal pattern in stock market volatility.

In July the proverbial summer doldrums can be observed, with volatility levels averaging less than 14 percent. Thereafter volatility typically increases to a peak of almost 19 percent in October.

 

Low volatility is not going to persist forever!

Many investors are currently betting on a further decline in volatility. In view of its already very low level and the negligible additional downside potential it offers relative to the substantial upside potential, this is probably not the best idea ever. Moreover, as shown above, October is the month in which volatility typically reaches a seasonal peak. Taking both of these facts into account, it seems far more sensible to expect an expansion in volatility.

As an aside: seasonal patterns are currently barely used by traders in volatility-related instruments and their options. You stand to gain an edge over competitors by using seasonality as an input for investment decisions with respect to all financial instruments you trade. Visit www.seasonalcharts.com, or call up Seasonax on your Bloomberg professional terminal by typing in “APPS SEASON”, or access it via the App Studio in the menu of Thomson-Reuters Eikon. There you will find precise seasonal charts, event studies and much more.

PS: it is probably the calm before the storm!

 

That dreaded moment when it suddenly becomes too quiet… [PT]

 

Charts by Stockcharts, Seasonax

 

Image captions by PT where indicated

 

Dimitri Speckspecializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix method in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange. For detailed information on the Seasonax app click here (n.b., subscriptions through Acting Man qualify for a special discount).

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Get Ahead in Today’s Economy
      “Literally On Fire” This week brought forward more evidence that we are living in a fabricated world. The popular story-line presents a world of pure awesomeness. The common experience, however,  falls grossly short.   There are many degrees of awesomeness, up to total awesomeness – which is where we are these days, in the age of total awesomeness, just a short skip away from the Nirvana era. What is Nirvana, you may wonder? We only know for sure that Nirvana is what...
  • Gold and Gold Stocks – Conundrum Alert
      Moribund Meandering Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the...
  • US Money Supply Growth Jumps in March , Bank Credit Growth Stalls
      A Movie We Have Seen Before – Repatriation Effect? There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.   The y/y growth rate of TMS-2...
  • Fear and Longing - Precious Metals Supply and Demand
      Waiting for Permanent Backwardation  The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.   Lettuce hope this treasure is not cursed... but it probably is....
  • Scorn and Reverence - Precious Metals Supply and Demand
      Shill Alarm One well-known commentator this week opined about the US health care industry:   “...the system is designed the churn and burn... to push people through the clinics as quickly as possible. The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.”   From the annals of modern health care... [PT]   Nope. That is not the standard...
  • Gold and Gold Stocks – The Gloom Patrol
      Fun with Positioning and Sentiment Last week we discussed the gold sector “conundrum” – the odd fact that there is apparently quite strong demand for gold despite a macroeconomic environment that would normally be considered quite bearish for the metal. Gold recently seems to have lost its last remaining inter-market “ally” if you will, as the dollar has begun to enter an uptrend as well. Positioning data in precious metals futures are nevertheless rather remarkable, given the...
  • Global Turn-of-the-Month Effect – An Update
      In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.   Good vs. bad seasonal timing...   [PT]   The effect has been studied...
  • Tales from “The Master of Disaster”
      Tightening Credit Markets Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.   A change in pace: yields are actually going somewhere. There is...
  • Is Political Decentralization the Only Hope for Western Civilization?
      Voting with their Feet A couple of recent articles have once more made the case, at least implicitly, for political decentralization as the only viable path which will begin to solve the seemingly insurmountable political, economic, and social crises which the Western world now faces.   Fracture lines – tax and regulatory competition allows people to “vote with their feet” - and they certainly do. [PT]   In the last few months, over 3,000 millionaires have...
  • Getting Out of Dodge
      Rare Commodity Modern economists are prone to shouting fire in a crowded theater.  The world is full of seeming incongruences. Economists puzzle over things like population growth and arable acres of farmland. They project out a linear scenario of increasing divergence, and see a catastrophe in the making.   Professional scaremonger Thomas Robert Malthus, one in a long line of scarcity prophets who failed to recognize the capacity of human ingenuity and free markets to...
  • “Sell In May And Go Away” - A Reminder: In 9 Out Of 11 Countries It Makes Sense To Do So
      A Truism that is Demonstrably True Most people are probably aware of the adage “sell in May and go away”. This popular seasonal Wall Street truism implies that the market's performance is far worse in the six summer months than in the six winter months. Numerous studies have been undertaken in this context particularly with respect to US stock markets, and they  confirm that the stock market on average exhibits relative weakness in the summer.   Look at the part we...
  • Why the Fundamental Gold Price Rose - Precious Metals Supply and Demand
      Gold Lending and Arbitrage There was no rise in the purchasing power of gold this week. The price of gold fell $22, and that of silver $0.19. One question that comes up is why is the fundamental price so far above the market price? Starting in January, the fundamental price began to move up sharply, and the move sustained through the end of April.   1-month LIBOR (London Interbank Offered Rate – the rate at which banks lend euro-dollars to each other). LIBOR and GOFO...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist