With the summer months suppressing volatility, depending on your strategy, it can make for tough trading conditions. But, if seasonal charts are to be believed, our bi-polar friend (aka volatility) may be about to return.
Taking the VIX as a proxy for market volatility we’re looking at its seasonality to identify volatility cycles throughout the year. Admittedly the VIX doesn’t account for global volatility per se, but it can leave its mark on global markets at times of crisis throughout the year.
Starting with a 5-year chart of the VIX, we’ve mapped its seasonal pattern throughout the year. It’s worth pointing out that we’re simply looking at an average of past performance so it’s not a predictive indicator. But it can provide a roadmap of ‘typical’ behavior which can be comforting when current price action follows suit. And, whilst not a perfect fit, we can see the general direction of the VIX is following its seasonal pattern so far this year.
The main point we’d like to highlight is that VIX tends to bottom around the middle of July before breaking higher throughout August. In some ways this is a little surprising given we’d typically expect August to be quiet too, yet we’re only looking at five years of data.
For a broader view we plotted the seasonal chart using all data available (28 years in this case). Again, we see it tends to bottom around mid-July before trending higher. Interestingly the trend between its July trough and October peak is relatively clean and direct, but the 5yr chart also serves as a reminder as to how prices can deviate from their longer-term average.
A simpler way to directly compare the charts is to view the monthly averages alongside one another. We can see that the VIX seasonal pattern has bottomed over all three time frames in July. The peaks tell a slightly different story as the 10 and 28-year charts peak in October, whilst the 5-year seasonal chart has peaked in January, February and September.
Still, with the VIX relatively close to this year’s ‘rock bottom,’ we’ll take what we can get volatility wise. And if the charts are to bear fruit, we may need to hold onto our hats as we enter August.