- The S&P 500-based VIX volatility index slipped below 10 intraday, but its 10.1 close was the lowest since Feb 2007
- Extreme quiet - also considered complacency - has been a universal phenomenon for the financial markets
- Such readings can always grow more extreme, so patience and abundant confirmation are critical to navigating the market
See how retail traders are positioning in the majors using the DailyFX speculative positioning data on the sentiment page.
It is always possible to push market extremes just a little further. Complimenting risk markets' push to record highs, volatility measures notched fresh milestones. With liquidity curbed due to the Chinese and European markets offline for the holiday, US markets wouldn't make an effort to compensate. The S&P 500 continued to consolidate at record highs while the Dollar Index kept its tight range following last week's remarkable technical break. For the SPX-based VIX volatility index, an already basement level activity reading managed fresh headlines. While the headlines went to the intraday dip below 10, that is only as remarkable as the February slip below that level. Far more remarkable was the 10.1 close for the index which is the lowest since February 2007.
Given the general depth of complacency, it is perhaps not surprising that an additional liquidity drain would push the measure slightly lower to a decade low. However, the temporary dive for the standard bearer can act as an exclamation point to how suspiciously quiet conditions have been. Looking at the short-term (the one-week VXST) and longer-dated (three-month VXV) volatility measures, we find a pace comparable to the Summer Doldrums of 2014. Furthermore, this is not just a state for equities alone. Measures of activity register remarkably depressed levels in the FX, emerging, Treasury and commodity markets. There is little doubt that the global markets are quiet but avoiding strong storm surges will grow increasingly difficult.
While there were notable gaps in the transmission of speculative appetite this past session, it is still remarkable that those traders online ignored high profile fundamental developments Monday. Amid a run of noteworthy data - including an unexpectedly sharp drop in the Fed's favorite inflation measure - the headline that was truly striking reported the US government was close to agreeing on a $1 trillion funding budget that could carry it through the end of the fiscal year. That offers considerable relief to an issue that in previous years unsettled the markets. What's more, last week offered something of a template to work off of in the relief rally gap realized after the weekend first round French election. We know that conditions cannot remain this staid forever, but it is also a path fraught with false starts trying to call the turning point. At the risk of desensitizing us further on the inevitability of risk trends' return, we discuss the new extreme from the VIX and other markets' activity measures in today's Strategy Video.
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