Shrinking Vols

"Long cruise, wasn't it, sailor?"
--Charlotte Blackwood (Top Gun)

Volatility indexes have completed a round trip from 'pre crash' levels. Vols tend to be decent sentiment indicators. When vols are high, folks are willing to pay up for put options (a.k.a. fear). When vols are low, option protection is ignored (a.k.a. complacency).

Just because vols are cheap doesn't mean the bottom will fall out of the market. Volatility can remain low for a long time. Moreover, there were periods in 2004-2006 when vols moved below 10 (currently in 16-17 range).

As such, volatility indexes tend to be concurrent indicators with little forecasting value.

That said, we can toss low vols to a growing pile of evidence that collective sentiment is pretty bullish.

position in S&P