Tastylive: The Last Time Markets Looked Like This, Volatility SPIKED
Market volatility has dropped to its lowest level since the start of the pandemic. Generally, volatility refers to how much investors and traders expect the market to move daily.
When the market is moving up or down 1-2 percent daily, volatility is high. When stocks trade closer to half a percent daily or less, volatility is low. Over time, market volatility falls into an average range. Currently, we’re dropping below that average range.
That could actually prove a warning sign. When volatility get low, it tends to spike higher It may indicate complacence by investors. Or that the market range was calming down ahead of a big reversal trend.
Part of the move lower could just be an adjustment from 2022. During last year’s bear market, volatility stayed over 20 for 91 percent of the time. Historically, the volatility index averages 17-20, so this represented a prolonged period of elevated volatility.
Since 1990, there have been 40 periods where volatility has been low for one month or longer. On average, these periods last 146 days, or about five months. When the trend ends, however, volatility tends to spike higher.
Overall, volatility is low most of the time. When volatility spikes higher, it’s a better time to make more options trades. And when it’s at the lower end of the range, investors should scale back.