logo

Markets were historically calm this year. Here’s what it means for stocks in 2018

VIDEO2:2002:20
What the VIX could do in 2018, according to a volatility expert

Volatility more or less evaporated from the marketplace this year, and some strategists are forecasting a similar environment unfolding in 2018.

The Cboe volatility index, or the VIX, dropped to all-time lows this year as the stock market itself saw historically subdued daily moves.

Selling volatility has proved quite profitable this year, and a similar scenario will likely play out in the new year as expected volatility remains low and economic conditions remain relatively strong, according to Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors.

"We think that volatility in financial assets, like the S&P 500, equities, are tied to economic conditions. And economic conditions have been pretty good this year. We've seen steadily improving economic conditions ever since the great financial crisis. And as economic conditions improve, that volatility has declined, and risk premiums have declined," the strategist said Wednesday on CNBC's "Trading Nation."

The likeliest scenario he sees in 2018 is that of a continued low average VIX, which measures expected volatility over 30 days. This year saw the lowest average VIX since its inception in 1990, Chintawongvanich pointed out, with an average mark of 11. To put that in context, the index's average level in 2008, in the throes of the financial crisis, was over 30.

The one other scenario, which he sees as far less likely, is one of heightened volatility amid a deterioration in economic conditions, either due to rising inflation or slowing growth. If that were the case, the strategist wrote in an email to CNBC, short volatility products like the XIV could suffer major losses.

Those types of exchange-traded products are precisely what could pose a risk to the market in 2018, said Dennis Davitt, portfolio manager and partner at Harvest Volatility Management.

Specifically, he pointed to exchange-traded products that have rallied hard this year on the back of record low volatility and are double- or triple-leveraged that "people don't quite understand." Of course, his concern comes as the amount of leverage in the market is not nearly where it was around the crisis, Davitt said.

The VIX remains the "ultimate forward-looking instrument" for gauging how people feel about the marketplace, Davitt said, though the way in which investors have interacted with it has shifted. Davitt said people are more comfortable trading in options due to technology than they were in years past.

The VIX was lower on Thursday, just below 11.

VIDEO8:1008:10
Volatility experts on what to expect for the VIX in 2018