U.S. stocks continue to hit all-time highs and volatility is crashing to all-time lows. This dynamic is critical context for what comes next. The surface of equity markets appears placid with the VIX down -32% year-to-date. Admittedly, that's a truth tracked by the mainstream media but an informed opinion about what it means and where markets go from here is decidedly under-reported.
Diving still further beneath the surface of stock market volatility reveals just how calm expectations of future volatility actually are. As Hedgeye CEO Keith McCullough writes in today's Early Look:
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"Put simply, as you can see in today’s Chart of the Day, when looking at an aggregated, multi-duration, implied volatility percentile reading for the Dow, Russell, and S&P 500, volatility EXPECTATIONS have literally NEVER been lower. And, in history’s time-series, never implies a long time." |
Yes, all-time, historic lows in future volatility expectations.
(Note: Implied volatility is a measure of investors' future volatility expectations that's implied in options markets.)
What Falling Volatility Means for Investors
You might be wondering, if investors are expecting historic lows in volatility, doesn't that imply complacency? Not necessarily. You have to also understand expectations of future or implied volatility versus historical or realized volatility.
Measuring and mapping the two against each other (implied volatility versus realized volatility) over time truly reveals the current investing landscape. Is it changing? Is it staying the same? That helps inform our views about where we go from here.
Here's McCullough again on the measuring and mapping of volatility and what our current proprietary risk ranges are saying about the current set-up for the U.S. stock market:
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"In other words, the volatility of volatility (the VIX’s risk range), is still suggesting that lower all-time-lows in US Equity Market Volatility are probable, inasmuch as the S&P 500’s risk range implies higher all-time highs." |
There you have it. That's where we think we're going. New all-time highs in the U.S. stock market and all-time lows in stock market volatility.
(CLICK HERE to learn more about our Daily Trading Ranges.)
