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Low VIX Raises Concerns of Stock Market Rally Coming to an End

Derek Wolfe

Updated: January 20, 2023

Vix
Editor’s Note:

EDITOR'S NOTE: Judging from recent market action, it appears that Wall Street has been showing signs of optimism and strength. But does it indicate healthy market conditions or are investors simply confused? According to one of the classic sentiment indicators, there’s every reason to believe that behind every rally is a growing sense of skepticism and fear. What the VIX, aka the “fear gauge,” is telling us seemingly contradicts what we’re seeing in the market. Here’s what some analysts are saying.

Wall Street’s fear gauge has fallen to its lowest level in months, and Wall Street strategists are concerned it could be a warning that the latest stock-market rally is coming to an end.

Specifically, they’re worried that the low level of the Cboe Volatility Index, otherwise known as “the VIX,” suggests that investors may have become complacent about the risks to their portfolios, raising the possibility that they could be caught off guard in a way that exacerbates the potential market mayhem, according to a series of research notes sent to clients and reviewed by MarketWatch.

Others said they’re worried the low VIX will soon revert to its long-term average, bringing the latest market rebound to an end.

Jonathan Golub, chief equity strategist and head of quantitative research at Credit Suisse, said in a note to clients dated Tuesday that the subdued VIX VIX, +0.88% means U.S. stocks may have already incorporated a slightly brighter economic outlook, leaving the market vulnerable for a near-term reversal.

“While the economic backdrop has become more favorable over the past three months, we believe that much of the upside is already discounted in a lower VIX and higher stock prices,” Golub said.

The VIX is flashing a warning sign from a purely technical perspective, others said.

The gauge looks “oversold” based on a model used by Fairlead Strategies Chief Technical Analyst Katie Stockton.

A “breakout” north of 22 could signal that stocks could be headed for another bout of upheaval, Stockton said in a Tuesday note to clients.

On Friday, the VIX finished the trading session at just above 18, its lowest closing level since January. By Tuesday it had recovered slightly to 19.36 as the S&P 500 finished the day marginally lower.

Although the S&P 500 SPX, -0.76% has been rising since the start of the year, it has basically gone nowhere for the past month, FactSet data show.

The S&P 500 finished modestly lower on Tuesday, falling by 8.12 points, or 0.2%, to 3,990.97. Still, the index managed to close above its 200-day moving average of roughly 3,978 for a second day in a row.

The trend of a low VIX isn’t exactly new. According to FactSet data, the fear gauge is currently below both its 50-day and 200-day moving averages, and has been since the end of October, the longest such stretch since 2021.

Investors have been watching the fear gauge closely since U.S. stocks began their long descent from their most recent all-time highs reached in January 2022. Some have speculated that the fear gauge appears to be “broken” after it peaked at levels associated with only moderate market stress during last year’s selloff.

The VIX is calculated via a complex formula that incorporates weighted prices of S&P 500 index puts and calls with roughly 30 days until expiration. Trading in short-dated options has less of an impact on the VIX, which has become an issue as using these types of contracts has become increasingly popular with traders, some have noted.

 

Originally published by Joseph Adinolfi at MarketWatch

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