The markets are hovering around the lows reached in late October, but there’s one major difference. The volatility in the market, as measured by the National Stock Exchange’s India VIX index, is comparatively at much lower levels. It has averaged 44 since February, compared with an average of 60 between mid-October and mid-November.
Back then, the index had touched intraday highs of 92 but lately the index hasn’t even breached the 60-mark intraday.
What gives? Well, in October and November last year, while the markets fell at a fast pace, there were also many occasions when they jumped back smartly.
Also See Unidirectional View (Graphic)
As a result, there were a large number of traders who would take buy positions to try and gain from a market rebound. It’s because of these strong views on both sides that intraday volatility had reached high levels. The difference between the intra-day high and low late last year averaged a little more than 7%, while currently the average is around 3%.
According to market analyst Arun Kejriwal of KRIS Research, the big difference now is that the market’s view is almost unidirectional. Foreign institutional investors are selling unabatedly and fund flows from domestic institutions aren’t enough to stem the downturn. As a result, few traders are sticking their necks out with buy orders. Trading volumes have taken a hit, consequently, and it’s no surprise that volatility is much lower.
What’s also helped reduce volatility in the markets is the decrease in the trend of markets opening with a wide gap, where the first traded prices are at a significant premium/discount to the previous day’s close. Late 2008, option writers would factor this overnight price risk as well as high intraday volatility while pricing contracts. With both these factors being less prominent these days, option prices are relatively lower.
What all this means is that while the high level of the “fear gauge” last October indicated the possibility of a bounce back as the panic abated, this time there’s no such silver lining. The markets seem to have got reconciled to the idea of a slow grind downwards.
Graphics by Sandeep Bhatnagar / Mint
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