Game of Trades: SP500 Volatility Is Breaking Out Again

While traders have been focused on the market’s strong rally since the start of the year, the rally has come with declining volatility. The days of daily swings of 2 or even 3 percent in the market have largely abated. Even 1 percent moves have become more of the exception than the rule.

However, the past few trading days have seen a move higher in volatility. And it could lead to a bigger jump in the weeks ahead…

It’s typical for markets to have a volatility spike after calming down. Looking at the volatility index (VIX) since 2018, it’s clear that there’s been a long-term uptrend.

Simply put, volatility has been making higher lows when it does settle down. That means traders expect the markets to have more daily swings.

Over the past 5 years, markets have performed well. But they have had some big pullbacks, such as the 2020 covid crash and the 2022 meltdown.

That’s similar to the markets in the 1990s. During that time, many tech stocks had big swings before the final tech bubble grew and burst, leading to higher volatility in a bull market.

However, we haven’t seen any big spikes higher such as in 2008 or 2020, even with the market’s slide in 2022, which was the worst year since 2008.

Such spikes tend to be short-lived, lasting months at the most, and usually just weeks. However, when that’s occurring, markets tend to be in a meltdown mode.

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