Tuesday, June 9, 2009

The Market is Vewy Vewy Quiet

"Be vewy vewy quiet, I'm hunting wabbits, heheheheheheh." Elmer Fudd

Following the breakout of last month's range between 875 & 930, you'd have thought we would have experienced a bit more volatility expansion than what we've seen over the last week and a half.

Surprisingly the last 6 trading days have all traded within last Monday's breakout candle. The SPX is in the midst of a time correction between 925 and 950.

As a direct result of this "vewy vewy" quiet market, most measures of realized volatility have continued to come in. The two measures of realized vol I follow the most are ATR (average true range) and HV (historical volatility). Current 14 day ATR levels on the SPX stand around 19 -meaning over the last few weeks the SPX has moved within a 19 pt. range on average per day. It's been quite awhile since we've seen the ATR sub 20. Low ATR levels often coincide with market tops. The trick is knowing what "low" is. Just because the ATR is sub 20, doesn't mean it can't drop lower before the market tops out. For past posts on ATR, click here.

Historical Volatility measures the realized volatility of a security over a given time period. Over the last 3 months the 30 day HV (blue line below) has diminished from mid 40's to mid 20s. Currently it sits at 25%.
So what's it all mean? To me it serves as justification for why the VIX has dropped to sub 30 over the last month. After all, it's tough to justify a 35 or 40 VIX when the SPX is only realizing 25% volatility. My guess is that before the VIX starts reversing upward aggressively, we may need to see an uptick in the realized vol of the market first.
However, I must admit the contrarian in me is starting to get antsy in getting long the VIX.

1 comment:

Mike said...

Great post. I recently read a great article on the same topic. It was about streamlining your analysis of a stock. You also described everything very clearly.
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