Nothing bearish about market calm


Market volatility continues to decline, recently hitting a seven-year low, and bears see this as indicative of 2007-type complacency, the proverbial calm before the storm. However, the decline in fear is not a warning signal – if anything, it augurs well for continued gains.

The Vix, or fear index, fell to 11 last week, way below its historical average of 20, and a reading seen just 4 per cent of the time over the last 24 years.

This might suggest little risk is priced into markets, although the Vix’s contrarian appeal can be overstated. Readings between 10 and 15, Citigroup noted recently, have historically been followed with average 12-month returns of 11.1 per cent, markets rising 88 per cent of the time.

Extremely high Vix readings during market panics tend to be brief affairs, but low readings can last for years, as happened between 1992 and 1996 and from 2004 to 2007.

Bill Luby of the Vix and More blog says history indicates volatility may well decline “or at least tread water” well into next year.

The Vix, he adds, has closed below 13 almost 1,000 times, “and almost all of these instances have been in the middle of a bull market”. Volatility drought may persist Vix readings only go back as far as 1990, but market movements over the decades confirm that volatility moves in cycles.

For example, some point out it’s been over 600 trading days since the S&P 500 moved 3 per cent or more in a single day.

Such moves have occurred on 200 occasions since 1950, or roughly once every 81 days. Therefore, the current calm is a historical freak – right?

Well, no. Back in the 1960s, investors almost forgot what such moves looked like, the S&P 500 going more than 1,600 trading days without seeing a one-day 3 per cent swing.

In the 1970s, 951 trading days passed without such a move; in the 1980s, 908 days; in the 1990s, 1,088 days; and in the noughties, between 2004 and 2007, 973 days.

It’s easy to point to apparent similarities between now and 2007, prior to the eruption of financial panic.

However, the same arguments were being made last year, just as they were in 2005 and 2006. Volatility will eventually return; in truth, however, no one really knows when.

Analysts get it wrong – again Analysts continue to slash European earnings estimates, with predicted 2014 growth of 14 per cent revised down to 7 per cent.

Investors haven’t been bothered, and little wonder; a recent Goldman Sachs note shows analyst estimates are almost always completely wrong.

Over the last 25 years, Goldman found, over 60 per cent of months have seen negative earnings revisions. On only three occasions were consensus estimates correct.

In fact, while analysts have been panned for continually overestimating earnings (downward revisions of 9, 12 and 11 per cent between 2011 and 2013), their recent record is comparatively good – since 1989, final estimates have, on average, been 14 per cent lower in absolute terms.

Downward revisions of 16, 23, 32 and 16 per cent occurred from 1990 through 1993, while initial estimates had to be slashed by between 27 and 31 per cent in 2001, 2002, 2008 and 2009.

Optimistic bunch, analysts.

Oil range continues to narrow The current absence of volatility is not confined to equities – it’s everywhere, causing Goldman Sachs to recently bemoan the “abnormal” trading environment.

Bonds have just witnessed the tightest three-month range in 35 years, Goldman noted, while the euro’s monthly moves relative to the dollar have been the narrowest since it came into being in 1999.

Even oil, traditionally volatile, is trading in a narrow range (so far in 2014, from $92 to $105, with the last three months almost exclusively spent between $100 and $105).

It’s a far cry from 2008, when oil topped out at $147 before falling more than $100, or 2009, when prices ranged between $32 and over $80.

Ever since, the yearly range has contracted, 2014’s movements representing a new cycle low.

Between 1996 and 2009, there was not a single year where oil’s yearly range was below 40 per cent.

In contrast, this year’s high price, as Attain Capital noted recently, is just 14 per cent above its low point.

This is a market for range traders, not trend traders, and booking small profits via a “buy low, sell high” strategy looks wise.

Or should we say, buy lowish, sell highish.

Oil range continues to narrow Forum forecasters are clueless A recent study has found contributors on the Yahoo Finance boards have – wait for it – no predictive power.

Academics’ desire for empirical evidence is admirable, but did they really need to sift through 32 million messages to confirm this most obvious of conclusions? The study can be read at

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