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The Chicago Board Options Exchange (CBOE) Volatility Index – commonly referred to as the VIX – hit a 5-year low last week. It wasn’t the first time the index had bottomed out in August.
The VIX measures the market’s volatility expectation over the coming 30 days. Composed of a wide variety of S&P 500 options contracts, the VIX is supposed to calculate uncertainty in the market – which is why it’s also known as the “fear gauge.”
And right now there isn’t much fear. In fact, volatility has been historically low of late.
Stocks have been trading in an incredibly tight range this month. Only two days since August 3 has the S&P 500 moved up or down more than 0.35%.
Trading ranges that narrow are quite rare. But they typically occur after periods of tremendous gains in the market.
That was the case again this time, as low volatility set in after the S&P gained nearly 9% in two months.
But could there also be a seasonal factor at play?
August is perhaps the biggest vacation month of the year, as families want to squeeze in one last trip to the beach or lake house before the school year starts. Investors also tend to take a vacation – both literally and figuratively.
August has been the lowest-volume trading month in two of the last four years. Even those who do stick around to buy and sell stocks seem to do so very conservatively.
Of the last eight occasions in which the S&P has traded in a range of less than 0.35% for seven straight days – as it did earlier this month – five of them occurred in August.
In that same vein, in the last decade the VIX has posted an average value of about 19.6 in August. Any value below 20 generally signifies low volatility – perhaps even complacency – within the market.
Stocks’ recent summer surge undoubtedly played a role in the VIX hitting a 5-year low last week.
But it’s also true that August is historically a low-volatility month.