Stock market investors have been on a roller coaster ride, but a closely watched measure of expected volatility has yet to convincingly indicate that the sell-off is about to bottom, analysts said Monday.
The Cboe VIX volatility index,
an options-based measure of the expected S&P 500 SPX,
volatility over the next 30 days, rose 13.3% on Monday to 34.20, above its long-term average of 20 but below the level that usually accompanies a market bottom, said Nicholas Colas, co-founder from DataTrek Research, in a note.
The VIX is sometimes known as Wall Street’s “fear gauge” because it tends to rise when stocks fall.
The VIX’s close on Friday at 2:30 left it in a “no man’s land” between 28 and 36, marking 1 to 2 standard deviations from the long-term mean, he wrote. The VIX hit 35 in early action as stocks tumbled early Friday, likely attracting algorithmic traders and allowing the market to make a modest comeback later in the day, he said.
“The bottom line here is that the 36 VIX level continues to ‘work’ as a signal of an intraday low, but we’d like to see it close at 36 or higher as evidence of a further slide in US equities,” Colas wrote. . “That really should have happened on Friday, with the 10-year Treasury yield rising to 3.14% and WTI crude back to $110/barrel. But it was not like that, so we are still waiting for an investable fund.”
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Stocks saw wild swings last week, soaring on Wednesday after the Federal Reserve unveiled a widely anticipated 50 basis point rate hike, only to give it all back and then some on Thursday as the Dow dropped more than 1,000. points. Major indices posted weekly declines on Friday, with the S&P 500 ending at its lowest level since May 19, 2021, while the Dow Jones Industrial Average DJIA,
posted its lowest close since March and the Nasdaq Composite COMP,
saw its lowest result since November 25, 2020.
Stocks extended the decline on Monday, with the Dow falling around 650 points to its session low, while the S&P 500 fell 2.6% to trade at its lowest intraday level since April 2021. The Nasdaq fell down 3.4%, leaving it up more than 25% year-to-date and trading at its lowest intraday level since November 2020.
Meanwhile, the VIX has yet to break above its April high above 36, let alone the March high above 37. Analysts have argued that indicates investors fear an even bigger sell-off in the coming months as the Fed is preparing to continue tightening aggressively in an effort to control inflation.
VIX futures also offer little comfort to those looking for a sign that the lows are near, Jonathan Krinsky, a technical analyst at BTIG, said in a note on Sunday. While the nearby VXK22 May futures contract,
trades at a premium of around 0.55 points to the June contract VXM22,
the gap needs to widen to send a convincing bottom signal, he wrote (see chart below).
Krinsky said that while this time might be different, every significant decline in the S&P 500 in the past 15 years “wasn’t over until the VIX curve got to -10 or below.”