Volatility Crashes, New Tech Highs, and 2000 vs. 2017

It’s only Tuesday, but what a week it’s been thus far in the equity markets…

Volatility Crashes

On Monday we saw the 4th largest decline in history for the Volatility Index (VIX), a 25.9% drop. This crash in volatility may sound familiar as #7 (post-election, 11/9/16) and #11 (post-Brexit. 6/28/16) also occurred within the last year.

Chart showing largest declines since 1990 to 2017 of Volatility Index

With increasing frequency, it seems, expectations of higher volatility in the options market due to some perceived negative event (this time: the French elections) do not pan out.

Graph showing changes in Volatility Index

Speaking of volatility, on Monday the S&P 500 finished up over 1%, which is not notable at all except for the fact that it was only the third time in 2017 we have seen a 1% move. If that pace continues, 2017 would be the lowest volatility year since 1965.

S&P 500 Ups and Down from 1928 to 2017

New Tech Highs

Not to be outdone, we saw something on Monday that we haven’t seen in 17 years – a new all-time high in Tech stocks. The Tech sector (XLK ETF) peaked back on March 27, 2000, and at long last has surpassed that level (note: total return including dividends). The lesson here: valuation matters very much at extremes. An absurdly overvalued asset can take a long, long time to “get back to even” after a bubble top. Japanese equity investors from 1989 are still waiting.

Technology Select Sector SPDR graph from 2000 to 2017

The best protection against a bubble/crash in a single asset class or sector: diversification.

Energy Select Sector SPDR Fund graph

2000 vs. 2017

Finally, the Nasdaq Composite hit 6,000 today, 17 years after hitting the 5,000 milestone. Some are comparing today’s market to back then but when you look closer there is really no comparison. From July 1995 through March 2000, the Nasdaq Composite quintupled (+400%), going from 1,000 to 5,000. Then it crashed and would take 17 years to move 20% above the March 2000 level.

Chart showing milestones of Nasdaq Composite

From the start of 1999 through the peak in March 2000, the Nasdaq Composite was up over 130% (note: price return).

Nasdaq Composite Index and returns from January 1999 to March 2000

Since the start of 2016, the Nasdaq is up a little over 20%.

Nasdaq Composite Index and returns from January 2016 to April 2017

The P/E of the Nasdaq in March 2000 was 175. Today it is 26. That’s not to suggest that stocks are cheap (they aren’t) or that they can’t go down hard from here (they absolutely can), but to say that hitting 6,000 is in any way comparable to the 5,000 level from March 2000 is to not have lived through (or studied) that period. There is only one March 2000 in U.S. stock market history, and we are still a long way from coming close to matching that unadulterated mania.


Related Posts:

Manias, Panics, and All-Time Highs

Are You Losing Sleep Over a 1% Decline in Stocks?

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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 four award-winning research papers on market anomalies and investing. 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 and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

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.

You can follow Charlie on twitter here.

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