The market recoveries from the Tech Crash and the Financial Crash have been remarkably similar. As I blogged in February, the S&P 500 index has closed out the last 3 years within 4 percent of the index 6 years before.
This year’s market, just like last year, started out fast but the spring correction brought it back to the old path. Thursday and Friday last week SPY closed within 1 percent of its value exactly 6 years ago.
Volatility has been the big difference between these two markets. The recent annualized implied volatility has averaged over 75% higher than the 2003—2006 levels (IV 22.62 vs. 12.76). I wondered if the realized / historical volatilities differed by that much. The charts below show those relationships for the 2003 – 2006 and 2009 – 2012 timeframes.
You can see the typical implied (IV) vs. historical (HV) volatility relationship—The HV briefly spikes higher than the IV in the late stages of a correction, and then the HV drops, mean reverting much faster than the IV. Around then everyone complains about how high the IV is compared to the HV value… Looking at the average values, both the implied and historical volatilities show the same 75% increase over the market 6 years ago (HV 17.68 vs. 9.96).
It continues to be a wild ride.
Monday, June 11th, 2012 | Vance Harwood