COMPLACENCY IS ONCE AGAIN A MAJOR RISK

MATASII RESEARCH ANALYSIS & SYNTHESIS: 

Investors fear volatility.

  • Low levels of implied volatility are the result of investors that are complacent and not protecting against risks.
  • Conversely, when volatility is higher, investors tend to be anxious, concerned about the future and as such take prudent actions to hedge and protect their assets.

AGGREGATED ASSET CLASS RISK

The graph below is constructed by normalizing VIX (equity volatility), MOVE (bond volatility) and CVIX (US dollar volatility) and then aggregating the results into an equal-weighted index.

  • The y-axis denotes the percentage of time that the same or lower levels of aggregated volatility occurred since 2010.
  • The current level is 1.91%, meaning that only 1.91% of readings registered at a lower level.

Beyond the very low level of volatility across the three major asset classes, there are two other takeaways worth pondering.

First, the violent nature in which volatility has surged and collapsed twice since 2018. The slope of the recent advances and declines are much steeper than those that occurred before 2018. The peak -to- trough -to- peak cycle over the last year was measured in months not years as was the case before 2018.

Second, when the index reached current low levels in the past, a surge in volatility occurred soon after that. This does not mean the index will bounce higher immediately, but it does mean we should expect a much higher level of volatility over the next few months.

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SOURCE:  03-27-19 - Authored by Michael Lebowitz via RealInvestmentAdvice.com  - "Nothing To Fear But Complacency Itself..."

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