With 2017 almost entirely in the rearview mirror, the most memorable - and we clearly use the term loosely - and certainly historic feature of the past year was the complete collapse in volatility. In fact, as Bank of America noted last week, by one measure the Dow traded in its tightest trading range in all history in 2017.
By other, more conventional measures, volatility in 2017 has been the lowest on record, with the following "stunning" VIX chart from Citi hardly needing an explanation: it shows the number of days with a sub-10 close in any 6 month window.
No matter how one quantifies it, hoiwever, one thing is certain: as DB said in its 2018 derivative outlook, "events produced very little vol in 2017. Vol spikes were few and shallow, and so technicalmarket risks were never truly triggered."
Which is not to say there was no vol: there were a handful of events that did manage to push VIX briefly into the mid-teens... if only for a day or two. Indeed, VIX spikes "were few and short lived during 2017, with none lasting more than a week or even a day."
And here is another perspective, this time from Bank of America, which shows 2017 through the lens of various asset class volatilities:
The paradox, of course, is that despite the record low volatility, we showed earlier that market fragility and instability is at an all time high. As BofA showed, "2017 stands out for generating an unprecedented number of 5 sigma 1-day SPX drawdowns, suggesting US equities are unusually fragile today by historical standards."
So is 2018 the year vol finally snaps? As usual, it will depend on central bankers. Remember last week we showed that "In Every Market Shock Since 2013 Central Banks Have Stepped In To Protect Markets"
While it remain unknown if this will change, one thing clear: never before have the market technicals been as stretched as they are now along 4 key metrics including i) VIX ETP vega to buy in a 5 vol VIX move, ii) Vol control funds forced to dump stocks in a 3% S&P seloff; iii) the S&P net gamma positioning of dealers and iv) CTA leverage and exposure to risk.
Looking at the above, some may argue that a massive, market-reseting crash may be precisely what the (non-PhD) doctor ordered to flush the "market" of nearly a decade of central planning, capital misallocation, artificial supply and demand, and fake price discovery, and that when it finally does come, it would be warmly greeted by the grateful investing public.