The S&P came into Tuesday having gone 16 straight sessions without an up or down move in excess of 80bps.
That’s a long streak and it speaks to the self-fulfilling nature of sundry modern market dynamics, as well as to something far simpler: It’s July and even when participation’s not lacking, conviction and interest probably are.
As everyone’s by now tired of hearing, we’re coming up on an inflection point for volatility, both implied and realized. History says both will expand in the weeks ahead, and if you’re someone who puts a lot stock (no pun intended) in seasonals, September’s foreboding. Historically, it’s the worst month of the year for US equities.
With all of that in mind, Nomura’s Charlie McElligott on Tuesday took a look at what history says about vol forwards following somnolent spot stretches like the one we’re in right now.
The figures above show you the backtest. On the left is the VIX and on the right, 20-day rVol, both measured based on prior instances during which the S&P went 16 consecutive sessions without a move exceeding 0.8% in either direction.
Vol “should now begin moving higher,” Charlie said. “That’s why from an equities perspective, the message continues to be ‘hedge when you can, not when you have to,'” considering sub-20 iVol and vol-of-vol sub-90 (versus the April 9 peak of 189).
Another dead-flat day today (so far), but VIX has been slowly creeping up. There’s definitely appetite for insurance out there.
I bought vol today, so I’m a minuscule fraction of that. I chose Russell 2000 Sep 30 puts. Pure speculation. I have a lot of short term cap gains this year, so if they go bust that covers about a third of my losses. If volatility rises at any point to where they are significantly in the money I’ll sell enough to cover my basis. Following McElligott through these pages, it seems things often work out the way he suggests the odds suggest they just might.
The first streak I got to experience began on Feb 9, 1966 when the DJIA reached 1000 on an interday high for the first time in history. It closed that day and 995 and never reached that level again, not even for a minute, until 10/11/82, 16.5 years later when it closed above 1000 for only the second time ever. That’s a streak. It more or less forced me into very conservative positions until the early 1980s when I switched entirely into T-bonds, bought at discount with high personal leverage. The next ten years in that strategy — (the Volcker years) paid for my retirement and sent me to stage two.