The Day Volatility Died

“And we sang dirges in the dark, the day volatility died.” – Hedge Funds, in unison

“I actually find myself daydreaming about winning ‘Dancing With the Stars’ on some days in the office. It’s gotten to be very difficult, when you depend on price movement to make a living, and there is none.” – Paul Tudor Jones

In the years to come, we may look back at yesterday as the day volatility died, at least in the collective minds of investors. The powerful combination of new all-time highs, the record streak above the 200-day moving average, and the easiest global monetary backdrop in history has finally set investors completely at ease.

Janet Yellen could do no wrong at yesterday’s press conference. With each and every assurance that she is as indeed as dovish as we all assumed, the market surged higher.

Inflation bumping up against your 2% target? Inflation data is “noisy,” said Ms. Yellen, as the markets roared with approval.

Risks? “I don’t see a broad based increase in leverage or a rapid increase in credit growth,” said Ms. Yellen. Again, the markets moved sharply higher.

And with deadpan humor, Ms. Yellen brought down the house with this to say on the subject of speculative behavior: “There is some evidence of reach for yield behavior. This environment of low volatility is on my radar screen. ”

Another surge higher in the S&P would follow as Ms. Yellen would not come close to acknowledging any connection between the 5+ years of quantitative easing (QE) and zero-interest rate policy (ZIRP) and this speculative behavior. Therefore, the algos naturally inferred that further speculative behavior and reaching for yield will not be an impediment to an “extended period” of dovish policy. And besides, Yellen made it clear that it is merely “on her radar” at this point and is in no way concerning to her.

Is Yellen’s complacency on the level of complacency justified? You be the judge.

  • If the VIX index closes the month at its current level of 10.45, it will be the 2nd lowest monthly close in history, trailing only January 2007.

Vol Fix

  • The ratio of the volume of equity puts to equity calls (put/call ratio) over the past 10 trading days is lower than 99% of historical readings.

Vol 2

  • The yield on Junk Bonds closed at its lowest level in history yesterday at 5.24%. The 30-day SEC yield on the most popular High Yield Bond ETF (HYG) with over $13 Billion in Assets is even lower, at 4.22%.

Vol 3

From these charts, you can readily see that Ms. Yellen is downplaying the level of complacency and reach for yield on the part of investors.  But should we expect otherwise from the Chairwoman as the Fed’s stated objective is to drive asset prices higher in support of their “wealth effect” theory? If she were to ever acknowledge increasing risk in the market stemming directly from the Fed’s policy, this would most certainly derail that goal.

But enough on the machinations of the Fed. What does this mean for markets going forward?

Well, there’s an old saying that “markets don’t crash from all-time highs.” There’s some truth to this notion as tops often take time to build (they are a “process”) and you generally see a period of higher volatility before a sharp decline ensues. Indeed, in looking again the lowest monthly closes for the VIX, you have never seen an exact cyclical peak (20% decline following) in the market coinciding with an extreme low level of volatility. For example, in the last cycle, we saw the low in volatility occur in December 2006, and the market did not reach its ultimate peak until 10 months later, in October 2007.

Vol 4

That said, while may not be at “the” top, this is not to say that volatility will remain low forever and that we will never see another correction again. As volatility is a mean reverting process and the long-term average for the VIX Index is 20, we are more likely than not to see an increase in volatility going forward if we look out more than just a few days.

Vol 5

So while investors can certainly enjoy the serenity of the moment, they should not assume that current market conditions in place today will be in place forever. For as Charles H. Dow said:

“There is always a disposition in people’s minds to think that existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which make it unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change.” – Charles H. Dow, 1900

At a tactical asset manager, we are constantly evaluating underlying conditions as an integral part of our investment process. Over the past two months, conditions have favored a more aggressive stance and we have been positioned as such in our mutual funds and separate accounts. Prices are up and the country is prosperous and many seem to believe this will always be the case as there are “circumstances connected” with this boom (namely the Fed and low interest rates) which make it “unlike its predecessors.”

We can all hope that this is the case but having lived through prior booms and busts we should remain skeptical of this notion. For our part as a tactical asset manager, we stand ready to take a more defensive stance when conditions inevitably change. Given the broad levels of complacency we are seeing today, this change, when it occurs, will undoubtedly be a shock for many.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers on Intermarket Analysis. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.


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