ANNANDALE, Va. (MarketWatch) -- No, that motion sickness you're experiencing is not all in your head -- though you might think so if you focused on the most widely used gauges of market volatility.
That's because investors interested in measuring the magnitude of the market's roller-coaster ride most often focus on the CBOE's Volatility Index
(VIX:
cboe volatility index vix
Last: 32.05-1.39-4.16%
4:14pm 05/08/2009
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VIX32.05, -1.39, -4.2%) . But that index is not, strictly speaking, a measure of the stock market's past volatility. It instead reflects option traders' expectations of future volatility.
The two are related, to be sure, but nevertheless not the same.
For example, the VIX hit its all-time high last October, when it soared to nearly 90. It is today in the low 30s, barely more than a third as high. And, yet, the stock market's actual volatility on a trailing basis is nearly as high today as it was then.
Consider the number of sessions in which the stock market rises or falls by at least 1%, as it did on Thursday, when the Dow Jones Industrial Average
($INDU:
Dow Jones Industrial Average
Last: 8,574.65+164.80+1.96%
4:04pm 05/08/2009
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$INDU8,574.65, +164.80, +2.0%) fell by 102 points, or 1.2%. Over the last 63 trading days (a calendar quarter, in other words), there have been no fewer than 43 such sessions -- or more than two of every three days in which the stock market was open.
The comparable number as of last Oct. 24, when the VIX hit its all-time high, was essentially the same -- 44 days.
So, at least from this perspective, recent volatility is just as high today as it was last October.
And that's very high indeed.
Consider that in all of calendar 2005, there were just 27 days in which the Dow rose or fell by 1% -- about once every 10 trading days, on average. In calendar 2006, there were just 25 such days.
The data paint an even starker picture when we focus on daily percentage changes of at least 2%. There have been 21 such days over the last quarter, or one out of three days in which the market was open.
The comparable number last October was 27, not that much higher than the current reading.
In contrast, believe it or not, calendar 2004 did not experience even one day in which the DJIA rose or fell by 2%. Calendar 2005 had just one such day, and calendar 2006 had none.
Looking at actual volatility, therefore, it is difficult to justify the VIX being barely a third as high today as it was last October.
Why is it nevertheless so much lower? Because options traders are less concerned about the stock market today than then -- far less.
And that, as I have argued in recent columns, is a bad sign from a contrarian point of view. (
Read my May 5 column.)
It adds yet more evidence that the market's impressive rise since March 9 may nevertheless be a bear-market rally.
