Dow: What Happened to Volatility?

A peculiar phenomenon.

Alex Dumortier
Alex Dumortier, CFA
Sep 20, 2012 at 10:38AM

Oil, which was just under the $100 mark at the beginning of the week, has suffered a sharp decline that began Monday afternoon. The price continues to fall this morning and is now below $92. One factor pushing prices down: Saudi Arabia has offered to extend supplies to its major customers in the U.S., Europe, and Asia.

I've commented a few times in this column on the extreme levels of the VIX Index (VOLATILITYINDICES:^VIX) -- Wall Street's fear gauge. The VIX is a measure of the market's expectation of future volatility in the S&P 500 Index (SNPINDEX:^GSPC) over the next 30 days, which is derived from option prices.

One possible reason for this phenomenon: According to research firm Macro Risk Advisors, realized volatility for the S&P 500 has been higher on "up" days than on "down" days this year. That's highly unusual; stock prices, whether it be the S&P 500 or the Dow (DJINDICES:^DJI), tend to fall faster and further than they rise -- and may be lulling investors into a false sense of complacency. That's a dangerous attitude as politicians march the country closer to the fiscal cliff (among other risks). Still, politicians do provide some positive catalysts from time to time. Check out our must-read free report on stocks that could skyrocket after the 2012 presidential election.