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Protracted Low Volatility Is Not An Unusual Phenomenon

Some traders complain in social media that volatility has stayed low for a long time or for longer than expected. According to those traders, this is an unusual phenomenon. Some are even upset blaming central banks for the low volatility pattern. However, analysis shows that protracted low volatility is not an unusual phenomenon.

New traders tend to blame the market, other traders, or central banks, for their lack of experience and skills needed to analyze price action. For example, recently some traders in social media have accused central banks for the protracted low volatility. Specifically, the S&P 500 daily returns have stayed within +/- 1% in the last 36 days, as it may be seen on the chart below:


While the pattern marked on the above chart obviously does not leave a lot of room for large trading gains, especially for short-term traders holding positions for a few days, it is not uncommon at all. In the S&P 500 chart since 1950 it may be seen that the current 36 day period with absolute daily return less than 1% does not even exceed three standard deviations:


Similar patterns that have even lasted much longer have occurred in the 60s, 70s, 80s and 90s. The mean period of these patterns of low daily volatility is about 9 days but the standard deviation is about 17 days. In 1995 a similar pattern lasted 95 days.

As markets get more efficient in their effort to defeat naive momentum and algo traders, the frequency of appearance of similar patterns will increase. Complaining about them is pointless. Traders should move out of the box traditional technical analysis has put them in and investigate alternative ways of dealing with this new market order.

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