In the last few weeks the index has moved a lot. From the highs of 6000+ on the Nifty in Jan, it is now below 5,500, a drop of more than 10%. But are we really seeing volatility?
The answer is, really: No.
We may have moved a little in three months, but let’s look at the daily percentage move (today’s close versus yesterday’s close). I’ll make an arbitrary statement that a day in which the index moves 2% is a Big Day.
Let’s look at the concentration of such moves since the Nifty’s inception:
On the top graph you can see that in nearly all years other than 2005, we have seen big daily moves on the market. 2009 saw the crazy 17% day on election results day, and 2008 had some serious down days, but even other years have seen huge moves of over 4%.
The lower graph shows the total number of "Big” days. Again, what’s evident is that the numbers are dropping – in 2010 and 2012, we saw the lowest count of just 14 such days. And in 2013, as we finish the first 1/4th of the year, we have seen ZERO such days.
This is not to say that the world is getting less volatile. Usually, periods of low volatility precede some huge market movements.
Many traders have taken the recent periods of low volatility and low volume to believe that they could easily make money by trading straddles or strangles (option strategies that bet on the index not moving by more than a certain amount). This can again be temporary: look at the number of days in a year that the Nifty was more than 10% from a month back:
The recently period is an obvious anomaly. What has changed? Volumes are very low, and I have even asked if India has lost interest in stocks. But that’s not really it – the volatility of individual stocks remains high. It could be because trading in options has become a primary driver of the market, and therefore option players regulate large moves to ensure sellers don’t lose too much. Again, that doesn’t make enough sense because options have always been big in western markets, and they haven’t also seen large volatility in 2008.
The answer, perhaps, is that this is a lull for stocks, and we are likely to see dramatic changes in volatility in the coming years. The “zeroes” in 2013 in the above charts strike me as particularly dangerous: We are likely to see a lot more volatility later this year, and probably in all coming years.