Canterbury Volatility Index (CVI 90) – The Canterbury Volatility Index (CVI) fell 5 points over the course of last week. Volatility has fallen considerably from its previous high of CVI 129. It should also be noted that the shorter-term CVI, which measures volatility over the course of 10 days rather than 67, is approaching extreme low volatility. As a reminder, when volatility is at extreme low conditions, markets are subject to outlier days (+/-1.50%).
Comment
Low/Declining volatility is a healthy characteristic for the market. Canterbury has conducted many studies on volatility that date back to 1896 on the Dow and 1950 on the S&P 500. One thing we know for sure from these studies is that markets are not random, nor are they evenly distributed.
One way to illustrate this is to look at the S&P 500 for the calendar years 2017 and 2018. These years were extremely different from one another. The year 2017 saw one of the longest streaks of low volatility ever recorded, dating back to 1896. The calendar year 2018, however, saw periods of much higher volatility. Because of this, 2018 had many more outlier days (+/-1.50%) than 2017 had. This is illustrated in the following two charts:
Chart1: S&P 500 Daily Fluctuations and CVI (2017):

Chart 2: S&P 500 Daily Fluctuations and CVI (2018):

Notice that Volatility, which was extremely low in 2017 (less than CVI 45 for the full calendar year), there were only 2 outlier days (beyond +/-1.50%). Compare that to 2018, where volatility was often greater than CVI 75, the market saw 37 outlier days.
When volatility (CVI) is low and stable, or decreasing, the probability of seeing multiple consecutive outlier days is low. When volatility is high or increasing, we see many more outlier days, often coming during consecutive days.
Bottom Line
Volatility is currently declining very quickly, and with it, so are the amount of outlier days. Since the volatility high of CVI 129 on January 4th (which was 33 trading days ago) there has only been one day exceeding 1.50%, up or down. The previous 33 trading days saw 14 outlier days.
It is very uncommon to see volatility decline this quickly. While it is a bullish sign, as the market is experiencing much less emotion, it would not surprise to see a spike in volatility over the coming weeks. Compressing volatility is like the squeezing of a spring, the more it is compressed, the higher likelihood of a pop.
The Canterbury Portfolio Thermostat is an Adaptive Portfolio Strategy, capable of navigating all market environments- Bull or Bear. Our Portfolio’s volatility remains low and stable, right around CVI 40, with an efficient diversification. Should we see a spike in volatility, the Portfolio Thermostat should behave as if in a normal market environment.

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.