The Streak of Low Volatility Continues

The Streak of Low Volatility Continues

Posted on October 23, 2017
Market State 1 Bullish/Rational (37 trading days): The S&P 500 remains in a low risk, bullish market environment.

Canterbury Volatility Index (CVI 30):  Volatility, as measured by the CVI, continues to decline. The current CVI 30 is now tied with the previous low in volatility which was CVI 30 on August 9th of this year. One would need to go back more than 50 years to see volatility as low as it is today.

Canterbury’s records on volatility go back to 12/30/1896 (almost 33,000 trading days). During that time, there have only been a handful of days that have seen volatility as low as it is today.

The current streak of consecutive trading days with the CVI at 45 or lower now extends to 206 days. There are only two low volatility streaks longer than the current one since the beginning of our records.

Longest streaks of consecutive trading days with the Canterbury Volatility Index at (CVI 45) or lower:
Streak 1: 333 trading days (CVI 45 or lower) ended on June 10, 1965.
Streak 2: 256 trading days (CVI 45 or lower) ended on March 12, 1945.
Streak 3: 206 trading days and counting (CVI 45 or lower) current streak.

Low and declining volatility is a low risk (bull market) characteristic. Low volatility indicates an “efficiently” traded market environment. In other words, it means that the portfolio’s current holdings are providing a high benefit of diversification in the existing market environment.
Chart 1 depicts the low risk/ bullish market environment that is a characteristic of periods with extremely low volatility.

Source: AIQ
During the longest streaks of low volatility, here is the Maximum Drawdowns (from peak to trough) and returns for those periods:
Streak 1: 333 days (ended 6/10/65) - Largest decline during the period was (6.4%)
  • Return for period (excluding dividends) +17.9%
Streak 2: 256 days (ended 3/12/45) - Largest decline during the period was (5.7%)
  • Return for period (excluding dividends) +17.8%
Current Streak: 206 trading days (and counting) - Largest decline was (2.8%)
  • Return for period (excluding dividends) +14.5%
The largest declines, during these periods of extremely low volatility, were equivalent to a normal bull market “pullback” defined as -5%.  A bull market “correction” is defined as about -10%.
It is also important to note that major events with unpredictable outcomes do not have an impact on markets, other than the “normal market noise” of about 5% to 10%, especially when the market is in a low volatile environment.
It is interesting that the longest streak, with extremely low volatility, occurred in a very difficult period in history. This period is considered to be one of the most difficult for political and social unrest. Blood Sunday occurred where Alabama troopers attack civil rights protesters in Selma; the Vietnam situation was heading south, and fast; and President Johnson sent the first ground troops to the Vietnam escalating war. The second longest streak of low volatility occurred during the last year and a half of WWII. The current period of low volatility is occurring during a period filled with natural disasters as well as many political, social, and international unknowns.
Bottom Line:
We remain in a low risk market environment. Expect isolated one day moves of 1.5% (up or down) in the near future. These “one day outliers” will come as a result of a knee jerk reaction to a lack of market movement.
Please take the time to reread the weekly update from 9/11/17 to more clearly understand how markets react to low probability/high impact events.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin
As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.