The S&P 500 is down about 10% from its early April peak. The majority of this decline happened in May, but it has happened without a strong jump in realized or implied volatility. If we look at this drop compared to 2010 and 2011, we see quite the vol suppression in 2012:
In 2010 we saw 10 and 30 day volatility get in the 30-35% level. In 2011 we saw 30 day hit about 45% whil 10 day hit almost 67%. As of May 31, 2012 we were looking at 14.5% 10 day volatility and 12.76% 30 day volatility… Lackluster indeed.
The fact is that we have seen a minimal number of days with market moves in excess of 2%. This is the reason for the mathematically low standard deviation. The real question is why the moves have been so dampened? Are there a lot of equity buyers that are eating up shares on dips? Are there volatility sellers jumping in to sell volatility when vol moves upward? Is the market complacent and waiting for further Fed actions?
The pessimistic thought is that we have yet to actually experience the strong market volatility that is coming with this correction. Maybe the -10% is a prelude to something much larger?
On the optimistic side, we might say that things are not as bad as we think and the market sees through the worries. As a bit of a backing to that thought, take a look at the suggested equity allocations from wall street strategists. It is at its lowest point since March 2009: