Friday, July 25, 2014

Low volatility regimes and why we're not yet in a bubble

Last 25 years there were 2 periods of S&P 500 low volatility with VIX hanging around 10-15 levels.

First one 1993-1995:

Second one 2005-2006:

There are similarities. Market evolution within a low volatility regime can be split on 3 parts: growth - moderate correction - fast growth to the moon. Fast growth eventually produces volatility increase and ends low volatility regime.

So now we have VIX in this 10-15 range. If this time will not be different, what can we expect?
1. This low volatility regime should last a couple of years.
2. We can expect moderate correction somewhere in the middle.
3. After that correction, we can expect even faster growth - and I know, this is hard to imagine. But some people believe the singularity is at hand, maybe they're right after all.

Even if we're in a bubble, there is no way this bubble ends somewhere about right now. We should see volatility rise WHILE market still grows. There should be a battle between leverage effect and momentum. A bubble bursts when leverage effect (high vol = low growth) wins. For now leverage effect (low vol = high growth) and momentum work together to bring the market higher.

My personal opinion is that we are in the beginning of a new technology bubble.

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