With the US equity market enjoying a period of very low volatility, the VIX index is being dragged down by the S&P 500’s low realized volatility. In the chart below, we compare the level of the VIX to the level of 10-day realized volatility for the S&P 500. As shown, realized volatility is grinding towards recent lows. In those situations, implied volatility (which the VIX measures) can’t stay elevated for long. Declining implied volatility is a direct response to elevated realized volatility.
The recent volatility decline has come after a 6-day run without a 50 bps move (through yesterday) for the S&P 500. That was preceded by 4 straight gains of at least 50 bps for the S&P. In the history of the index, that combination has only happened once before: the 10 sessions ended April 14th of 1966. As shown in the chart below, the result wasn’t great for equity investors, with stocks plunging more than 20% over the subsequent six months. These sorts of analogues are, of course, fodder for much anxiety and bearish crowing, but it’s important not to read too much into a sample size of just one. Start a two-week free trial to Bespoke Institutional to access our entire suite of investment tools and all of our daily research.