Volatility Might Be Awakening From a Coma, But It's Still Groggy

(Bloomberg) -- Volatility is picking up again in markets after a prolonged period in the doldrums. The S&P 500 Index tumbled the most in six weeks on Thursday and Treasuries are heading for their worst four-day slump since March.

Investors responded with a rush to the hedges -- driving up options prices that are tracked by fear gauges and feeding concern this year’s relentless stock rally is teetering on the brink of a serious reversal.

The rout still left global equities on the cusp of eight months of gains and not far from a record high, even as central bankers raise the prospect of a tightening cycle. And as the charts below show, implied volatility remains near some of the lowest levels ever seen.

Volatility Might Be Awakening From a Coma, But It's Still Groggy

The CBOE Volatility Index just had its biggest intraday increase since the Brexit vote a year ago, at one point surging 51 percent. The S&P 500 slid as much as 1.4 percent, the most since May 17, as most sectors took a beating, particularly technology. Ten-year Treasuries are falling a fourth day, with their yields climbing 13 basis points this week. Yet volatility is still only half the level of early November and a long way from the 26-mark hit last June.

Volatility Might Be Awakening From a Coma, But It's Still Groggy

Volatility in Treasuries and stocks rebounded in June, the first time since October that both rose. It was hardly a dramatic recovery though, and a major currency gauge was down. Volatility has dropped as financial institutions ease up on riskier investments amid tighter regulatory curbs after the global financial crisis.

Volatility Might Be Awakening From a Coma, But It's Still Groggy

This week’s turmoil has done little to disturb long-term trends, however. 
The S&P 500 remains well above its 200-day moving average, and it’s gone more than six months without a one-day drop exceeding 2 percent, the longest such stretch in a decade. The key market to watch may be bonds, where 10-year U.S. Treasury yields have just come back above their moving average.

As the final chart shows, fear gauges are still rather close to their all-time lows.

Volatility Might Be Awakening From a Coma, But It's Still Groggy