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How to Predict a Big Jump in Stock Market Volatility

"The market is a fractal, not a linear system, so change is inevitable."

by Bob Stokes
Updated: December 11, 2018

"My goodness! Haven't we already had a big jump in volatility?" you might exclaim after looking at the headline.

Well, that's the point.

Here's what I'm talking about: The December 2017 Elliott Wave Theorist, which published early on Oct. 23, showed two stock market volatility charts.

Here's that first chart along with remarks from the Theorist:

RecordLowVolatility

Persistent new highs in stock prices week after week and recently day after day have led to a substantial reduction in the volatility of stock prices, to the point that the CBOE Volatility Index has just reached an all-time low. The VIX futures contract is widely characterized as a bet on the future, that is, as a gauge of expected volatility... Low volatility always leads to high volatility, but the VIX never prices in that inevitability.

Indeed, here's what many hedge fund managers and some deep-pocketed trend followers were doing around that very time, as revealed by this chart and commentary:

SpeculatorsVolatility

Naturally, yet amazingly, in the current environment of record low volatility, Large Speculators today are short a record number of VIX futures contracts... Whereas past extremes saw maximums of 25,000 and 100,000 contracts short, in October 2017 they are short 175,000 contracts. This stance indicates that they believe the VIX will not only continue to lower levels but that it will also do so by a substantial enough amount to make big bets on it worthwhile. But the market is a fractal, not a linear system, so change is inevitable.

And it wasn't long before that inevitable changed unfolded.

As you'll recall, stock market volatility took a big jump in late January and early February of 2018, with the DJIA surrendering 10% in less than two weeks.

And investors know that the year has also brought other periods of eye-brow raising volatility.

Indeed, on Dec. 7, Bloomberg reported that the S&P 500 has had 1% daily trading swings 56 times so far in 2018.

Can investors expect more triple-digit gyrations as we go into 2019, or is the market due for a breather?

EWI's Financial Forecast Service, which includes the Elliott Wave Theorist, reveals what our analysts anticipate next.

The latest Theorist is available to you to read risk-free! Do look below to learn more.


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When you read the Elliott Wave Theorist for the first time, your first thought may be about what you've been missing.

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Yes, market technicians appreciate Robert Prechter's decades of experience using the Elliott wave model. Yet every subscriber knows that the charts and text communicate insights that can open the eyes of the newest reader.

EWI received these two subscriber comments in December 2018:

"Please thank Mr. Prechter for providing interim EWT updates, especially during such tumultuous times.  It’s a monthly publication and I really don’t expect interim updates between regular scheduled monthly issues.  So, his providing subscribers with interim updates is much appreciated and valued.  Best wishes for the holidays." -- Ed J., Alberta, Canada

"Bob, I wouldn’t have the slightest interest in Elliott Wave if it weren’t for you. Today, it saved my bacon." -- Biff

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