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The New York Times ran this graph on the stock market's volatility yesterday. I heard Dylan Ratigan the other day describing how volatile the market is. Actually, the market's volatility isn't very high on an historical basis. It's just much higher than it's been.

Here's a look at how well the S&P 500 has done by VIX level, which is an index of implied volatility. I took all the daily returns of the S&P 500 since 1990, and reordered them, not by date, but by VIX level. The Y-axis is the cumulative gain.

The magic point is 22.66. When the VIX is below that, the market does well. Above that, not so much. Before last July, the stock market had gone over years with only breaking the magic mark twice. Since then, we've been above it about half the time.

This comes as a bit of a surprise to me because I've generally felt that volatility doesn't have much impact by itself. Perhaps I have to reconsider, though my chart only includes data since 1990. I wouldn't mind seeing more.

(Note: Since I wanted to include the VIX numbers on the X-axis, the graph is actually a scatter-plot, so it's a bit distorted. Here's a view sans X-axis labels.)

Posted by edelfenbein at January 7, 2008 2:43 PM