After a sharp rise from mid-April to mid-May of this year, stock market volatility is crashing. This has been historical a good sign for equities, except when it was not.
The daily chart below shows the 21-day annualized volatility of the S&P 500 index.
Realized volatility nearly doubled from mid-April to mid-May and peaked at 33.2%. Since May 25, the realized volatility has been falling steadily, and it is now at 18.5%.
Implied volatility, as measured by VIX, has also declined from 34.75 on June 13 to 22.33. The rapid decline in both realized and implied volatility is a good sign for equities historically, except when it has generated false signals, and there have been quite a few during past bear markets, as shown below.
During the dot-com bear market, there were three false signals, with realized volatility rising above 30 and then dropping below the +1-standard deviation, only to rise again. During the financial crisis bear market, there was another similar false signal in April 2008, followed by a decrease and then a spike due to the market collapse.
Volatility is a good technical indicator, but as with all derivatives of prices, it lags price action and can generate false signals that end up being too costly.
Premium Content 10% off for blog readers and Twitter followers with coupon NOW10
Disclaimer: The premium articles are provided for informational purposes only and do not constitute investment advice or actionable content. We do not warrant the accuracy, completeness, fitness, or timeliness for any particular purposes of the premium articles. Under no circumstances should the premium articles be treated as financial advice. The author of this website is not a registered financial adviser. The past performance of any trading system or methodology is not necessarily indicative of future results. . Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
