Analysis: Wall Street’s ‘fear gauge’ offers no silver lining as bear market looms

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 4, 2022. REUTERS/Brendan McDermid/Files

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NEW YORK, May 13 (Reuters) – A surprising lack of panic in the U.S. stock market, as measured by Wall Street’s “fear gauge,” is preventing some investors from bottoming out in an already painful stock sell-off. .

Since 1990, the Cboe Volatility Index (.VIX) has reached an average level of 37 at market lows, compared to its most recent level of around 32.

Some investors believe that means stocks have yet to see the crescendo of fearful selling that has sometimes accompanied recent market lows, even though the S&P 500 is already down nearly 20% from its all-time high. a level that would confirm a bear market.

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“The sentiment is negative, but there is no real fear, no sense of panic,” said Kris Sidial, co-founder of The Ambrus Group volatility arbitrage fund. “The only thing you’re not seeing is the capitulation.”

The VIX, which measures the expectation of stock market volatility as expressed by option prices, is well above its long-term average level of 17.6.

Many investors believe volatility is likely to remain elevated as markets digest a hawkish Federal Reserve, soaring inflation and geopolitical uncertainty stemming from the war in Ukraine.

While the VIX doesn’t need to shoot higher before calm returns to the markets, the fact that the index hasn’t risen much above 30 may be a sign that the stock sell-off isn’t over yet. has been removed, making it more dangerous for those looking to buy. on weakness, market participants said.

“I just don’t think we’ve seen that kind of bottoming event,” said Steve Sosnick, chief strategist at Interactive Brokers.

The VIX had posted a closing high of 82.69 during the COVID-19-driven selloff of March 2020, after which the S&P 500 more than doubled as the Fed cut rates and implemented other easy money policies. to support the economy. The index hit 36.07 in 2018, when stocks paused slightly before entering a bear market on concerns about tighter Fed policy, and peaked at 80.86 during the Great Recession.

“I would love to see more panic and outright blushing in this market,” said Mike Vogelzang, chief investment officer at CAPTRUST. “I would love to see VIX at 40 or 45.”

One reason the VIX, which is calculated based on S&P 500 option contracts, may be relatively dovish is that the gradual sell-off has left investors lighter on their allocation to stocks.

Investors’ aggregate equity positioning has fallen to the lowest levels since the 2020 COVID-19 sell-off, Deutsche Bank analysts estimate.

Meanwhile, options positioning on the S&P 500 and VIX shows a market that is very well protected against declines, said Brent Kochuba, founder of SpotGamma analytics service. With defensive positions in place, investors see little rush to buy more puts, even as the market tanks, Kochuba said.

The VIX is far from the only signal investors look at when trying to determine whether markets have bottomed, and at least one measure of volatility (one-month historical volatility) shows markets may be closer to a turning point. than that indicated by the VIX.

That volatility measure sits at 29, its highest level since July 2020 and about 4 points above where it was on the day the S&P 500 bottomed during the last 54 instances of corrections and bear markets dating back to 1928, a Reuters analysis showed.

Still, some believe a rally in stocks is unlikely to last without a major “shock” in volatility.

“What you have now is people waiting and waiting for a bounce,” said Patrick Kaser, portfolio manager at Brandywine Global Investment Management.

However, to mark the end of the sell-off, the market needs a “high-profile moment of failure and pain,” Kaser said.

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Information from Saqib Iqbal Ahmed; Additional reporting by Davide Barbuscia; Edited by Ira Iosebashvili and Sam Holmes

Our standards: the Thomson Reuters Trust Principles.

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