VIX Shows Elevated Fear Among S&P 500 Traders, But Not Yet at Post-GFC Peaks
Matt Weller, CFA, CMT October 11, 2018 8:25 PM
After pausing briefly on this morning’s slightly softer-than-anticipated inflation data (see my colleague Fawad Razaqzada’s post, “Dollar extends but CPI miss not a game changer” for more), US stocks have resumed yesterday’s selling rout. As of writing, the Dow Jones Industrial Average is trading off by another 500+ points, with the S&P 500 falling by more than 2% as well.
Interestingly, the tech-heavy Nasdaq index (-1.2% as we go to press) is outperforming the more traditional large-cap indices after seeing the worst performance yesterday, but when it comes to US stocks, there’s nowhere to hide. All 11 sector SPDR ETFs are falling on the day, with Energy leading the way lower at -3% as WTI sheds 3.5% on the day.
That said, we are seeing some differentiated performance among other asset classes, unlike yesterday. High-quality bonds are on the rise, with yields on the benchmark 10-year Treasury falling 4bps to 3.13%. Perhaps most impressively, the long-maligned “useless yellow rock” has quietly broken out of its two-month range to trade up near $1225, its highest level since late July.
Not surprisingly, this week’s market disruption has led to a big surge in the CBOE’s Volatility Index, Wall Street’s so-called “fear index.” The VIX measures the market’s expectation for volatility over the next 30 days, using the implied volatility of the front two months’ put and call options on the S&P 500.
While the calculation itself would put most readers to sleep, the current VIX chart is worth watching. After hitting historic lows under 9 through last year’s consistent rally, the VIX exploded to a peak above 50 amidst the last major interest-rate-driven market disruption in early February. After settling back down into the low teens throughout Q2 and Q3, the index has surged to peak near 29 so far today.
What does that tell us? For one, traders are not (yet) pricing as much volatility as they were in early February; colloquially, you could say that traders are not as “scared” as they were back in February. It would likely take another day or two of strong selling pressure to reach a peak in the 48+ range that has marked significant bottoms on four occasions (May 2010, August/September 2011, August 2015, and February of this year). That said, we’ve seen plenty of near-term market lows form with VIX readings in the 25-30 range, so we may well see a bottom form in the coming days.
While its notoriously difficult to trade, the VIX can provide a real-time gauge of the amount of panic in the US stock market; based on the current reading, traders are clearly wary, but fear has not yet reached the post-GFC peaks that marked major longer-term bottoms.
Source: TradingView, FOREX.com
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.