Declining volatility, what trend in the coming months?

Volatility in financial markets was at its lowest for almost a quarter. After the strong increases recorded since October 2015, the market nevertheless seems to be returning to stability. But the question is: will it last? And what would be the trend in the coming months? A brief analysis is required before drawing a conclusion

A significant drop

The VIX or Volatility Index remains the leading indicator of volatility in the stock market. Introduced in 1993, it was initially calculated on the S&P 100 Index, but since 2003, it has been obtained by the evolution of the S&P 500 Index. Its interpretation is simple: the higher the market, the more unstable it is and, automatically, investors find themselves in periods of significant indecision. Depending directly on the global economic situation, the record value of VIX was recorded in October 2008, at 89.53. It then fell back after government intervention, but another peak was reached on August 8, 2011, with a 50% increase, following sharp declines in US equity markets.

Thus, until October 2015, the VIX was still quite high. However, March 2016 showed a significant drop in this indicator. Just two months ago, the Volatility Index was 53, while today it stands at 13. A decrease of nearly 80% was recorded on the weighted average of the S&P 500 Index call and put options. It remains to be seen whether this financial stability will be maintained over time, and for how long.

A seasonal variation

If we refer to the history of the VIX, we automatically notice that during a certain period, it tends to decrease sharply. In March, April and May, the market seems to adopt a certain calm and each year, it is during this quarter that the best performances are recorded. The investment results are, for the most part, positive during these three months and sometimes we have even seen exponential figures. Exceptions exist, however, but are rare. The years with negative market results, from March to May, included 1929, 2008 and 2011. The year 2016, on the other hand, seems to follow this seasonal trend of the VIX, which is currently at 13.

But what would then be the forecasts for the coming months?

Referring to the evolution of the VIX, which is also a long-term index, we can see that the KST indicator is following an upward trend. Volatility could rise further in the coming months, with a likely VIX value of 34.