04 Feb 2010
Volatile year ahead for equities

Hello and welcome to CantosCharts. My name is Clive Corcoran. I am the Editor and Publisher of tradewithform.com and I'm also a Consultant to the International Capital Markets Association.

In this segment I want to look at the CBOE Volatility Index which is more commonly known as the VIX. I want to look essentially at the last year really on a daily basis of this Index and point out a few things which I will suggest are leading me to the conclusion that we're looking for higher volatility ahead.

As we know, the period, say, since last March '09 saw the market, broad market, rally substantially 60, 70 per cent. During this period, the volatility diminished throughout and, interestingly, it has remained below this pink cloud formation for most of the period. We did have a couple of spikes up here and here. This one I think was associated with the Dubai World episode and now we are in this position where we have come down here and based around the 15 level. We had an opening gap here which to some commentators suggested that we were in fact reaching a position of great complacency. Following that, we have now, as we've moved into this first month of the New Year, we've seen this spike up. Two very severe spikes followed by a fade. But interestingly enough, we are in fact actually moving back up now into this pink cloud formation.

What that is suggesting to me is that unlike these previous spikes where the fades came right away and they were momentary peaks of anxiety if you like. I suggest that the underlying level of anxiety now in the market is increasing and that does coincide with my general view of equities at the moment which is that the next six months of this year could well be a period of turbulence for the equity markets.

To give a historical perspective on the VIX I've grabbed a chart here which covers the monthly values on the index going back about 15 years (13, 15 years).

We can see just how abnormal the period was in the end of 2008 as we moved into 2009. This enormous spike up here, which took the VIX to a level of 90 actually, or virtually 90, was completely unprecedented throughout the history of the period we're looking at here. We did see crises associated, for example, with the LTCM crisis in '97. We see a crisis here, the Asian crisis. We see the 2001 combination of the Nasdaq collapse, also the period of 9/11 and so on.

So where we sit at the moment, which is around the 25 level, is not in itself an abnormally high reading considering these spikes here were up to 40 and I mentioned this one went up to 90. But I think that the trend, if you like, that we've seen for diminishing volatility during most of 2009, as we've moved into this new year of 2010, I think this is the beginnings of a move back towards a more volatile market.

It would not be surprising as I said from the previous chart, that we go up and test the 30 level and quite possibly we could go beyond that, which of course, suggests that the underlying tone to the equities markets in the US and probably most of the markets of the world, is probably going to be more volatile and turbulent as we move through 2010.

Well thank you very much for watching this episode of CantosCharts. I'm Clive Corcoran and I look forward to seeing you again.