Is Low Volatility Signaling a Market Top?
Charter Trust Company
By Mark Ungewitter
June 11th, 2014
We keep hearing that today’s near-record-low volatility is signaling an imminent market top. To test this proposition, we examined implied volatility back to 1986 using the VXO index. (VXO behaves similarly to VIX, with the advantage of a longer track record.) Friday’s VXO reading of 10.3% was a near-record low. Weekly readings below 11% are rare events, occurring only 3.6% of the time. The chart below flags all such occurrences in red. Most of the time, the market has moved significantly higher after it enters a super-low volatility environment.
We conclude, therefore, that today’s low volatility is not sufficient reason for a market top. Historically high volatility, on the other hand, is a good indicator of market bottoms.