The Cboe Volatility Index touched its lowest level in six months on Friday as U.S. stock indexes surged, finishing near record territory, and raising some concerns that investors may be getting complacent.
The VIX VIX, -7.76% referring to index’s ticker symbol, hit an intrasession low at 11.95 on Friday, marking its lowest level since Oct. 3, according to FactSet data. That move came as the Dow Jones Industrial Average DJIA, +1.03% the S&P 500 index SPX, +0.66% and the Nasdaq Composite Index COMP, +0.46% were on the verge of breaking above their all-time closing peaks.
Read: The ‘volatility cavalry’ is coming for the stock market, other assets, according to this chart
The VIX itself, which uses S&P 500 options to measure trader expectations for volatility over the coming 30-day period and is often referred to as a guide to the level of investor fear, has declined by 67% after spiking above 36 back in December amid a brutal selloff at the end of 2018.
However, stocks have U-turned higher, with the VIX, which tends to move inversely to stocks, turning south. Gains for the market have been supported by an apparent reversal in policy by the Federal Reserve, which said a weakening global economy was giving it reason to pause interest-rate increases that had been seen as tightening financial conditions and roiling stock benchmarks. The tone was seen as an about-face from the Fed’s hawkishly received December meeting when it delivered its fourth rate increase of 2018, representing the ninth increase in borrowing costs for markets since the end of 2015.
The perception of progress in trade talks between the U.S. and China also has guided assets perceived as risky higher, and the haven 10-year Treasury benchmark yield TMUBMUSD10Y, +2.80% has remained relatively quiescent, stuck in a range between 2.5% and 2.6%.
Those tandem moves have some market participants worried that the market could be due for a spike in the VIX. The VIX’s long-term average is above 19, but has spent long periods at well below average levels in recent years. Meanwhile, the S&P 500 has roared back 24% from its Dec. 24 low, the Dow has climbed 21.2% and the Nasdaq has surged nearly 29% over the same period.
Salil Mehta, a statistician and former leader a former director of analytics for the Treasury Department’s $700 billion TARP program, said in a tweet that “if stocks take the stairs up & the elevator down, then volatility takes the stairs down & the elevator up.”
if stocks take the stairs up & the elevator down,
then volatility takes the stairs down & the elevator up pic.twitter.com/Qdq6aHlBFa
— Statistical Ideas (@salilstatistics) April 12, 2019
In other words, Mehta is suggesting that the market could be primed to deliver a dose of volatility driving the VIX higher and markets sharply lower.
Sven Henrich, a founder and lead market strategist at NorthmanTrader.com, wrote on MarketWatch that such volatility compression, as has been expressed in the VIX in recent trade, tends to lead to big spikes, similar to a coiled snake that eventually pounces.
“Volatility compression can extend as we’ve seen before, and this pattern can suggest prints in the 12 range being possible. But it also strongly suggests that the next big move in VIX is not lower, but rather a launch higher. A lot higher,” Henrich said in a mid-March column.
Indeed a protracted period of quietude in the VIX in 2017, with the measure falling to single-digit readings, culminated in an epic 118% surge in early February of 2018 to 37.32, which cratered a number of investment products pegged to VIX.
Even so, Andrew Thrasher, a chartered market technician, told Barron’s, in a recent article, that he expects volatility to rise, but not to the level seen in 2018. He described bets on S&P 500 options as investors selling VIX to professional traders who are buying it up on the cheap as protection, or insurance, in case market’s eventually implode.
“For those reasons, I think we’ll see a move higher in volatility, but not expecting a repeat of the VIX explosions in February,” he told Barron’s.
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