Don’t Poke The (Volatility) Bear

The VIX may have climbed to 14.6 today, but it’s still running below this year’s average of 17.2. In fact, before today’s selloff the last 2 VIX closes had a 12-handle, something we hadn’t seen since January. A few points here:

• The VIX peaked at 37.3 on February 5th and bottomed at 9.15 on January 3rd.
• The VIX averaged 17.4 in Q1 and averages at 17 so far in Q2.
• These figures still fall below the average of 19.3 since the VIX was created in 1990, but is up meaningfully from last year’s average of 11.1.

Bottom line, even though the VIX has come back down of late, today is a good example of how last year’s complacency is solidly in the rear view mirror. That’s why we gauge uncertainty in the market through many measures, including a regular review of the number of times the S&P 500 gains or loses more than 1% in one day. Here’s where it stacks up half way through the second quarter:

• So far this year, the S&P has gained or lost more than one percent on 32 days, compared to the annual average of 53 since 1958 (first full year of data). In other words, it is already past the half way mark to the annual average despite still having a month and a half left in just the first half of this year.

• Much of this year’s volatility stemmed from the ETF vol meltdown in early February, as Q1 experienced 23 one percent days compared to the first quarter long-run average of 13. Even still, Q2 is on track to meet its long-run average of 13 as well with already 9 one percent days in the books and 32 more sessions still left in the quarter.

• We could see even more than 4 additional one percent days this quarter above its long-run average given that volatility is clearly back to stay. The historical data shows this well: during years where the S&P saw between 20 and 25 one percent days in Q1 (like this year), there were subsequently 19 such moves in Q2. Nevertheless, the S&P returned 1.9% for Q2 during those years despite greater volatility. The S&P is currently up 2.7% so far this quarter.

So when should you look for volatility to really start ramping up again? We look at the number of times the VIX has peaked and troughed during every month of each year since it was created in 1990, and this analysis shows distinct seasonal patterns of volatility. A couple of points:

• We’re not surprised volatility has calmed down this month, as the VIX has only peaked in May once. Next month should be more volatile, as the VIX has reached its annual high 3 times in June.

• The back half of the year has the most volatile months, as the VIX has peaked in August and October the most number of times at 5 each since 1990.

The upshot: if you think withstanding volatility so far this year has been tough, it’s likely only going to get more difficult in the back half. With that said, we see outsized moves in the S&P particularly to the downside as an opportunity to buy the market at more attractive entry points if your investment mandate allows for it.