Blokland’s daily sketch

Equity market volatility has dropped significantly in recent weeks. The VIX index is close to its lowest level since July and daily moves in stock prices are muted. In fact, the percentage of days over a one-month period in which stocks move 1% in either direction has dropped to zero. And this has been the case for the last six trading days. This, however, does not mean you should immediately turn more cautious. First, because there have been much longer periods of such extreme tranquility in markets. For example, between 26 June and 9 October 2018, a period of 76 trading days, there were zero 1% price moves over a one-month period. Second, while this metric is a strong contrarian indicator when volatility is high, hence the number of 1% moves during a one-month period is high, research carried out by my colleague Jamie Stuttard reveals that it’s forecasting power for both equities and investment grade credits is less accurate when things are quiet.