Volatility seemingly is creeping back into the markets after going AWOL for a few years. Volatility tends to correlate with bear markets, although it hasn't really been a factor since 2003, partly you could argue because there has been a *Bull bounce* or that the nature of rangebound markets are conducive to low volatility.
Volatility tends to make for very choppy markets. Stoplosses therefore are triggered more frequently, trends are interrupted, and trading becomes from a timing perspective increasingly difficult.
By March 2003, the VIX stood at 30.6.
That turned out to be the high point for this cycle. In March 2004, the VIX averaged a reading of 17.7. By March 2005, the average was just 13.1.
The first four months of 2006 saw VIX readings as low as 10.74. For the year through May 10, the beginning of the current sell-off, the VIX averaged just 12. Investors had become accustomed to low volatility, and fear had dropped to levels even lower than in the run-up to the 2000 bubble.
Instead, we're headed back to normal times when stock markets and stock prices fluctuate with something like their average volatility. Given the recent abnormally low level of volatility, a return to normal is going to hit some investors hard. Abnormally low levels of volatility have led some professional investors to load up on debt in order to pursue risky investments.
The classic example currently being the Yen carry trades, that have added fuel to the housing run up, and arguably the speculation in commodities.
With the Yen trade fast approaching the end, does the increase in volatility signal the end of nice easy trend trades?