Abandon All Puts, Ye Who Enter Here

Bloomberg ran a very interesting story yesterday, which unfortunately does not appear to be anywhere online, entitled "Puts Abandoned in Calmest Stock Market in Two Decades."   The gist of the article, as discerning readers can no doubt glean from the title, is that realized volatility is exceptionally low, so no one wants puts.  The statistic cited was the somewhat remarkable fact that the S&P 500 has not registered a daily move of 1% or more in either direction in 40 trading days (41, now that yesterday's 0.08% rip-snorter is in the books.)  That's the longest stretch since 1995.

Being a sucker for these sorts of stats, Macro Man went ahead and double checked using a much longer data set.  Unsurprisingly, the Bloomberg article was correct.  However, the current period of lassitude has nothing on the early 60's, which once saw a full six months go by without a single 1% daily move.  Thank god this was before Black and Scholes published their paper!

Observant readers will no doubt note that we have only recently passed a similar period of quietude in late 2006 (the year that vol died) and early 2007.   In the unlikely even that anyone has forgotten how that episode resolved itself, the chart below shows the same metric from late 2006 through the end of 2009.

Ah, for the glory days of 2008, when there was a three month span in which at least every other day was a one-percenter.  Wednesday's Fed statement, SEP, and presser are an obvious potential catalyst to break the recent skein of lassitude, particularly if Yellen decides to suggest that "well, we might, y'know, eventually hike rates, that sort of thing" in her best Carney imitation.

More prosaically, the recent deterioration in Iraq has put a firm bid to oil.   Although the rest of the commodity complex has not exactly exploded higher in sympathy, the y/y change in the CRB index remains close to its highest level in two and a half years.  While the nefarious Professor Woodford and his army of egg-headed minions would likely scoff at the notion that this represents "inflation", financial markets tend to react to the headline figure rather than the trimmed mean market-based deflator for personal consumption expenditures excluding food, energy, education, rent, insurance, transport, amusement, clothing, health care, pet supplies, communications, and personal hygiene services, the Fed's preferred measure.

So while current market conditions might well suggest "Abandon all puts, ye who enter here", Dante eventually left the Inferno, and volatility eventually will, too.   Without a Vergil to guide us, however, it's hard to know whether that day will come today (Super Tuesday?  Pshaww!), tomorrow, or the end of the summer.   But come it will, oh yes.