Does low Volatility matter? Two weeks India VIX reported a very low reading and we did get a broad market correction. But does the lowest reading in history mark a major top in markets. On twitter there was an exchange that IV rises before a top. Yes this has happened many times and could almost be true as gospel. So let us look at the chart below of the US VIX It made a bottom 1993 and rose from there for years. The final top for the markets was in 2000, 7 years later. It bottomed again in 2006 and the final top for the market was 10 months later in 2007 [S&P). Now the trendline of those two lows was kissed this month. Maybe we have a new low or bottom in VIX and volatility only rises from here. 7 years and then 10 months are hardly any time correlations that we can draw as to how long after a bottom in VIX can we get a top in equities. It is true that short term rallies in VIX are associated with short term correction in equities. What is not clear is the long term relationship. All that we should think now is that this is an unusually low reading for the US VIX and a US stock market correction is the least you can expect. What it might mean for the longer term would require a long term analysis of the US equity indices themselves.
Adam Smith Associates offers trade & commodity finance related services & solutions to its domestic and international clients. Views expressed in this article are purely of the author – Mr Rohit Srivastava – a leading technical analyst. Visit www.adamsmith.tv for services offered by Adam Smith Associates Pvt Ltd