The Volatility Signal We Haven't Seen Since 2007

Everyone knows volatility has been low in 2017, but last week was ridiculous. By one measure, which is shown below, it is the lowest stock market volatility we have ever recorded. On the other hand, S&P 500 Index (SPX) historical volatility (HV) temporarily moved above a key level, sending up a signal not seen since 2007. Below, I'll consider whether that means anything going forward.

Last Week's Record

Only 12.3 points separated the high and low last week on the SPX. The average close for the index was 2,504, therefore, the entire range of the SPX last week (from the low to the high) was less than half a percentage point. That is the smallest range since we began collecting high/low data back in1978. The table below shows the 20 weeks where the range from the low to the high was the smallest. I was surprised to see three of the five weeks have taken place this year. We knew volatility was extremely low, and this just underscores the point.

2017: The Quietest Year Since 1993

Low volatility weeks have become the norm in 2017. I defined "low volatility weeks" as weeks where the S&P 500's high/low range was less than 1.5%. Since 1978, about 12% of all weeks were below this level. This year has had the highest frequency of low volatility weeks, with 64% having a range below that threshold. The only other year where more than half of the weeks were low-volatility weeks was 1993. The top six spots on the table below are years of the 1990s or the current bull market.

Single-Digit HV Streak Breaks

Another volatility statistic we were eyeing was the consecutive days where the 20-day HV of the SPX was below 10%. This stretch ended earlier in the month after 189 days, and was the third-longest streak since we have data (back to 1929). The last time we had a stretch of at least 100 days of single-digit HV -- what we'll call a "signal" -- ended in early 2007, just before the financial crisis. The table below shows all streaks of at least 100 days of single-digit HV.

I was curious how the market responded after the streak breaks. Can volatility get "pent up," and is the broken streak a catalyst for sudden volatility? Looking at the SPX returns after these streaks get broken, the answer seems to be no.

Historically, there has been just slight S&P outperformance in the very short term, when we look at one-month returns. After that, the performance is similar to the index's typical returns. What I was curious about was whether volatility pops after these streaks end. Looking at the standard deviation data, the volatility after the streaks end mirrors normal index volatility. This is anti-climactic, but I guess what we learned here is that volatility is low, which we already knew, and going forward expect nothing out of the ordinary.