As stock prices have moved higher since the start of 2012, the one major constant has been a lack of realized volatility. 10 day realized volatility has stayed below 20 for almost the entire period (15 months), which is new for the 2009 to 2013 bull market, but was par for the course between 2004 and 2006. The chart of 10 day realized volatility in the SPX over the last 10 years:
I’ve drawn a red line at the 20 level, which was rarely breached during the 2004-2006 period, and has been similarly subdued over the past year. Though the market was flat in 2007, realized volatility had started to pick up ranging between 10 and 30 (as opposed to 5 and 20 previously) during the second half of the year.
In that context, as the SPX approaches its 2007 high of 1576, it’s worth watching how volatile the market behaves if/when it breaks that high. If it’s a continued grind up, and the minor selloffs don’t induce much volatility, then it’s unlikely to be a major turning point. But if emotional trading leads to big moves in both directions, then the psychological backdrop that generally accompanies a change in direction is at hand.
Markets Overnight:
- Asia traded mostly in the red, led by China down 1%. China continues to be one of the weakest global equity markets, up only 1% in 2013.
- Europe has traded close to flat the entire session, with peripheral yields continuing to inch lower. Interestingly, Spanish and Italian 10 year yields are almost back to the same level, around 4.65 (Spain had much higher yields for most of the past year)
- The dollar and Treasury bonds are higher, though commodities are higher as well.
- NFIB Small Business Optimism came in at 90.8 vs. 90 expected, and no major economic data expected for today.