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Extremely Low Volatility Is Not A New Phenomenon

In the last three days the S&P 500 has moved less than 0.33% overall but this has also happened a few times in the 60s and 70s. Extremely low volatility in stock market indexes is not a new phenomenon but its causes may be different now from the past.

As shown in the daily S&P 500 chart below, the index overall change from highest high to lowest low in the last three trading days is just 0.323%.

This volatility crush is not a new phenomenon. Similar 3-day volatility patterns have occurred in June 1967 and December 1971, as shown in the chart below:

When I first started working in Wall Street, I remember an older guy, a stock broker at a large firm then, telling that that there were period in the 60s and 70s that their only daily activity in the office was playing chess. People were not day trading and most market participants were very conservative long-term value investors.

Nowadays, there are also not too many day traders and the majority of algos do conservative growth/momentum investing. There are no too many human brokers that have nothing to do but there are many in “do nothing investing” business, most unfamiliar with market dynamics but doing mostly marketing.

When volatility returns, and probably it will at some point, not too many professionals will know what to do, other than a few traders that are still around. If market swings increase, investors in passive funds may panic and go in stampede mode. It will be an interesting development and some traders are looking forward to it because it will be their turn to profit from dumb money.

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Charting and backtesting program: Amibroker

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