Volatility in the market is up 33% in the past two weeks, with the VIX index now at what’s usually considered a harrowing level. You might be forgiven for thinking this is the start of the end of the world.
But from a slightly longer point of view, this is actually “normal.” The volatility index closed today at 25.56. On average, through the past year, that’s only 5% above the 200-day trend.
And it isn’t like we’ve never experienced a market mood this wild. The last time the VIX hit this level was back in mid-July, barely five weeks ago.
We don’t have to like it. But this is roughly what we’ve just spent a year surviving. We know this level of volatility is survivable. If you can’t survive it, it’s because your reservoirs of energy are drained.
You’re allowed to be tired. The market, on the other hand, never rests. Wall Street keeps playing the cards we’re dealt.
Volatility is good for options traders who can accelerate the amount of profit they earn on even the slightest fluctuations in prices and sentiment. We’ve been doing that a lot in my option strategies.
And there are signs that volatility is actually calming down. Believe it or not, the “quiet” cycles are getting quieter . . . and the spikes that punctuate them are getting quieter too.
Go back to March. The VIX peaked at a truly unnerving 37.79, which essentially reflects stock prices moving 3-4X as fast as the long-term average.
A day later, the market started calming down. By the end of April, stocks had braked to the point where the VIX was only half as high.
Then the next spike took the VIX back to 36.64. High . . . but not as high as the previous month. These are aftershocks now, each echo reverberating a little less loudly.
The next bottom was lower. The next spike wasn’t even able to clear more than a fraction above 35, and the bottom after that was lower yet.
Here we are now. The VIX can keep climbing. If it peaks below 35, it’s a clear sign that the market mood is still healing. And if it doesn’t, we’ll simply have to grind our teeth a little longer as the process starts again.
I’d love it if the VIX drops a lot farther. We could all use a little quiet . . . conditions haven’t really qualified for that since just before the pandemic erupted in early 2020.
Remember when the VIX was below 12? When it was “too quiet?” Now we dream of that scenario. It will come again.
For now, however, there’s a comforting sign. Volatility across the last 50 days is now back below the 200-day trend line, which is a pretty good statistical hint that momentum is negative for the VIX right now.
We enjoyed that situation throughout most of 2021 as the Fed soothed the COVID crash. It would be great to get a taste of that again.