"The Strangest Thing..."


A few weeks ago I wrote an entry about the historical context of current equity volatilities. The conclusion was that volatility is low (startling I know), but if we compare it to the years from the pre-VIX era it isn't quite the extreme outlier it appears. Since 1950, two years have had lower volatilities (1964, 1965) and four others (1952, 1963, 1972, 1995)  are about the same.

But 2017 is unusual in a couple of other ways. First, the ratio of absolute value of return to the realized volatility is very high. Volatility is low but we have actually moved a fair distance. As of mid-October, the S&P 500 annualized return to average 20-day volatility ratio was 3.07 (return of 21.5% and a volatility of 7%). The average ratio since 1950 has been only 1.29. Only 1954, 1958 and 1995 have had higher ratios.

Even more extreme is the ratio of maximum draw-down to realized volatility. The average value has been 0.99. So far this year the number is 0.4. The biggest draw-down has been only 2.8%. Only 1995 was lower at 0.34.

So this year's quietness isn't so much about volatility, as it is about the extremely smooth nature of the rally.


Euan SinclairComment