Stock volatility: back with a bang and here to stay

NEW YORK (Reuters) – U.S. stock markets are unlikely to return to the unusually calm conditions seen last year, even though equities have already recovered more than half the ground lost in the recent selloff and traders have rapidly dialed down fear.

Stock market volatility spiked to a multi-year high in the selloff and some products that flourished in low volatility collapsed. A higher-volatility environment means the 1 percent stock market swings of the past two weeks will become commonplace, strategists said.

It is something that investors will have to get used to. The Cboe Volatility Index .VIX, the most widely followed barometer of expected near-term volatility for stocks, last year logged a historically low average of 11.

“We expect the current shock to herald a higher volatility regime,” said Jim Strugger, derivatives strategist at MKM Partners in New York.

The VIX reached a 2-1/2-year high of 50.30 on Feb. 6. Since then it has slipped to 17.60, still well above the record low of 8.56 hit in November.

“Fear has come down dramatically but certainly not to the level of complacency seen pre-correction,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

“VIX futures seem to indicate that the VIX could trend down from current levels to maybe as low as 15 over the next couple of months, but there are few, if any, signs we’ll see 10 again any time soon,” he said.

The VIX is derived from the price of S&P 500 options and is an indicator of investors’ collective estimate of near-term gyrations for the benchmark stock index.

Despite the recent shock that led to the shuttering of popular exchange-traded products used to bet on stock market calm, traders are pouring money into that trade again.

The ProShares Short VIX Short-Term Futures ETF (SVXY.P), which gains as long as volatility declines or stays low, has drawn about $418 million on a net basis since Feb. 6, the day the VIX peaked, according to ETF.com data.

But things may be a little different this time. The Federal Reserve is shrinking its balance sheet and raising interest rates. U.S. corporate earnings could be the other factor to watch.

Analysts expect S&P 500 earnings to keep rising for the next few profit periods, peaking at 21.3 percent growth in the third quarter and moving to 17.8 percent growth in the fourth quarter, according to Thomson Reuters data.

“When earnings growth starts to roll over and go from positive growth to negative growth, a deceleration, you see volatility increase in the market place,” said Nick Kalivas, senior equity product strategist at Invesco PowerShares, in Chicago.

“I have been counseling clients to think about using products like low volatility or quality to help essentially mitigate some of the downside risks that are present,” he said.

Sharper equity market gyrations could serve up opportunities for stock pickers to shine.

“That will place more of an emphasis upon the quality of active management and stock picking, asset allocation and all the stuff that theoretically we get paid for because we are good at,” Orlando said.