VIX revisited

I did a very quick post back in June noting the very low VIX level. Since then, VIX has remained very compressed and at very low levels: 

That chart (source: Yahoo Finance) goes back to 1990 and shows that current VIX levels are bouncing along at all time lows. VIX is seen by many as the canary in the coal mine: low VIX = low volatility = high investor complacency = time to be really scared. This has plenty of people worried, including famed deep value investor Seth Klarman who in a recent letter noted the 'bubble in complacency' and cited worrying tell-tale signs of investor behaviour. 

The last time when VIX was ultra cheap for a sustained period was 2004 to early 2007 during the great stock market boom. Shortly after VIX started moving high in lock-step with the stock market wobbling then crashing. The low VIX period before that was roughly 1992 to the early 1996. VIX then moved aggressively higher, so you would guess that the stock market tanked, right? Let's take November 1995 as a data point: VIX 12, S&P500 630. Fastforward to November 1999: VIX has through some savage peaks and troughs moved to 25 and S&P500 has actually moved up to 1400. 

That's almost a two and a half-fold increase in the market (excluding dividends) during a period of rapidly increasing volatility. And that's even after the S&P500 had already risen substantially. 

These are only a few points in history, so it's difficult to make assumptions. I don't work at Renaissance after all. I do however think it's fair to say that low volatility does not automatically mean tough times ahead. Interesting, anyway.    

Kristian