From March 1996 to October 2000, the S&P 500 rose from the mid-600’s to around 1550, culminating in the bursting of the Nasdaq bubble. From March 2009 to October 2013, the S&P 500 rose from the mid-600’s to around 1750, where we stand today.
From low to high, the 2009-2013 rally was the larger move (and hence, more volatile on a long-term basis). But in the 1996-2000 rally, the VIX was actually above 20 for the majority of the time:
I’ve marked the 20 level of the VIX in red, which shows how the VIX hardly traded below 20 between 1997 and 2000. That was on the rallies as well as the selloffs.
In contrast, from 2009-2013, VIX spot has spent the majority of the time below 20, and practically all of the time below 20 in the past 18 months:
Once again, the 20 level is marked in red.
I find it fascinating that the total point increase over time has been greater in the 2009-2013 period, but implied volatility has been much, much lower during this rally than during the 1996-2000 rally.
In other words, close-to-close volatility has been much lower this time around, even though the volatility of the entire bull market has been higher.
Is the compression of that daily volatility a sign of health or complacency? We’ll only know that answer in retrospect. But this week’s action in the VIX has caught our eye as well. VIX spot is higher this week, even as the SPX index has rallied to new all-time highs. CC p0inted out that the action was similar to what we wrote about on May 15th of this year, in this post:
Sure enough, new all-time highs in the SPX index have resulted in an almost 100 point move higher since that breakout. The move’s velocity has picked up in the last week, which is causing volatility traders to re-assess the low pricing of options. Buyers of protection are also likely getting more aggressive as prices advance so aggressively.
With no upside resistance for the SPX index, volatility is liable to increase in both directions. Regardless, with the VIX in the low teens and realized volatility increasing in the high fliers (see NFLX, FB, BIDU or GRPN today), the risk/reward for long VIX trades looks increasingly attractive. We’ve had alot of success with long VIX strategies this year (most recent here) and we’ll be looking for similar entries if given the opportunity in the near future.