In the panic of stock market crashes and the frantic rush to sell, investors indiscriminately unload shares. As investors universally head for the exit door, prices fall and the volume on stock exchanges spikes along with stock market volatility.
Now contrast this with what happens in bull markets. Investors buy, volume heads higher and volatility falls. This exact environment describes where we're at today. In short, to get a complete picture of what's happening in any asset class you need to measure and map three factors: price, volume and volatility. (Note: These are the three factor inputs in Hedgeye CEO Keith McCullough's Daily Trading Ranges.)
Here's how price, volume and volatility stacked up in equity markets yesterday.
1. PRICE
The Nasdaq hit an all-time high yesterday. The S&P 500 and Russell 2000 closed at their respective all-time highs.
2. VOLUME
Total US equity volume was up +15% and +25%, respectively, versus its 1-month and 1-year averages.
3. VOLATILITY
All-time highs in stocks, all-time lows in volatility. At a 9.58 close the VIX is tracking toward all-time lows (low-end of our risk range = 8.92 for now) with an implied volatility DISCOUNT of -7% vs. 30-day realized.
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. (Note: Implied volatility is a measure of investors' future volatility expectations that's implied in options markets.)
BOTTOM LINE
Expect this regime of all-time lows in volatility, all-time highs in stocks amidst rising volume to persist, even if it’s occasionally disrupted by pullbacks. The U.S. economy is accelerating. In other words, those pullbacks are great opportunities to buy the dip.
Want more? Here's a video of Hedgeye CEO Keith McCullough discussing the current set-up in stock market volatility.