Tag: Equity Derivatives

Oil prices jump after drone attack kills U.S. troops, escalating Mideast crisis

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Oil futures popped higher Sunday evening, after a drone attack that killed three U.S. service members in northern Jordan, blamed by the White House on Iran-backed militants, marked a major escalation of tensions in the Middle East.

West Texas Intermediate crude for March delivery
CL00,
+1.22%

CL.1,
+1.22%

CLH24,
+1.22%
was up $1.09, or 1.4%, at $79.10 a barrel on the New York Mercantile Exchange. March Brent crude
BRN00,
+1.15%

BRNH24,
+1.14%,
the global benchmark, gained $1.11, or 1.3%, to trade at $84.66 a barrel on ICE Futures Europe.

Much will ultimately depend on the U.S. response and whether Iran takes action aimed at shutting down the Strait of Hormuz, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch on Sunday afternoon.

“We are on the cusp of this escalating, which could seriously impact the flow of crude oil,” he said.

Three U.S. service members were killed and more than two dozen injured in a drone strike on a U.S. base in northeast Jordan, according to U.S. Central Command. They were the first U.S. fatalities in months of attacks on U.S. bases by Iran-backed militias since the start of the Israel-Hamas war in October.

President Joe Biden attributed the Sunday attack to an Iran-backed militia group and said the U.S. “will hold all those responsible to account at a time and in a manner (of) our choosing.” News reports said U.S. officials were still working to conclusively identify the precise group responsible for the attack, but have assessed that one of several Iranian-backed groups is to blame.

Some congressional Republicans called for direct retaliation on Iran.

“We must respond to these repeated attacks by Iran & its proxies by striking directly against Iranian targets & its leadership. The Biden administration’s responses thus far have only invited more attacks. It is time to act swiftly and decisively for the whole world to see,” wrote Sen. Roger Wicker of Mississippi, the senior Republican on the Senate Armed Services Committee, in a post on X.

Oil futures rallied last week to their highest since November, but with gains attributed in part to production outages in the U.S. and more upbeat expectations around economic growth.

“Crude already has the wind to its back, so this will only offer further upside,” Chris Weston, head of research at Australian brokerage Pepperstone told MarketWatch in an email.

With the U.S. election later this year, “Biden needs to strike a balance between increasing aggression that potentially puts U.S. serviceman lives in danger and could potentially raise the cost of living…while also showing a defiant stance that shows his resolve against terror,” Weston said.

Oil prices have seen short-lived rallies around developments in the Middle East since the start of the Israel-Hamas war, but have failed to build in a lasting geopolitical risk premium. West Texas Intermediate crude
CL00,
+1.22%

CL.1,
+1.22%,
the U.S. benchmark, remains around $15 below its 2023 peak in the mid-$90s set in late September. Brent crude
BRN00,
+1.15%,
the global benchmark, pushed back above $80 a barrel last week.

Attacks by Iran-backed Houthi militants on Red Sea shipping have forced a rerouting of tankers and cargo ships. For crude, that’s had implications for the physical market but hasn’t interrupted the flow of crude from the Middle East.

A move by Iran aimed at closing off the Strait of Hormuz, the world’s biggest oil-transportation chokepoint, remains a top worry.

The strait is a narrow waterway that links the Persian Gulf with the Gulf of Oman and the Arabian Sea. At its narrowest point, the waterway is only 21 miles wide, and the width of the shipping lane in either direction is just two miles, separated by a two-mile buffer zone.

Energy Information Administration

Around 21 million barrels a day of crude moved through the waterway in the first half of 2023, equivalent to around a fifth of daily global consumption, according to the U.S. Energy Information Administration.

The U.S. stock market has largely looked past Middle East tensions, with the S&P 500
SPX
returning to record territory this month, while the Dow Jones Industrial Average
DJIA
has also set a series of records.

Dow futures
YM00,
-0.20%
were off 94 points, or 0.3% as Asian trading got under way, while S&P 500 futures
ES00,
-0.22%
fell 12 points, or 0.2%, and Nasdaq-100 futures
NQ00,
-0.24%
lost 0.3%.

Read: Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week

Away from oil, there were no signs of a significant surge in demand for instruments that traditionally serve as havens during periods of increased geopolitical tension. Futures on U.S. Treasurys
TY00,
+0.21%
saw a modest rise of 0.2%, while the U.S. dollar
DXY
was little changed versus major rivals and gold futures
GC00,
+0.41%
ticked up 0.4%.

Escalating Middle East tensions won’t go unnoticed by traders, but probably doesn’t warrant a “solid derisking,” Weston said, particularly with investors facing a barrage of major market events in the week ahead.

For U.S.-focused investors, the week ahead features a Federal Reserve policy meeting, earnings from tech industry heavyweights and a crucial December jobs report.

The Middle East situation “won’t take us too far off the rates, growth track, but we have an eye on whether this escalates,” Weston said.

—Associated Press contributed.

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January 28, 2024
Why this Treasury market trade continues to draw scrutiny

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Inside the $26 trillion Treasury market, perhaps the deepest and most liquid place for government debt in the world, a particular trade continues to draw scrutiny ahead of year-end. It’s the “basis trade,” a way of profiting on the differences in prices between Treasurys and Treasury futures. While such differences can be relatively tiny, one’s potential profit or loss can be exponentially magnified when leverage is involved.In a nutshell, the basis trade takes an arbitrage approach: It involves borrowing from the repo market for leverage and financing, and then taking a short Treasury futures position and a long Treasury…

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December 22, 2023
What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek

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Wall Street’s so-called fear gauge has been subdued this year, in a “mysterious shrinking” pattern, that’s a bullish signal for equities, according to DataTrek Research.

Declines for the Cboe Volatility Index
VIX
fear gauge come despite continued worries over inflation and elevated interest rates.

“We’ve been saying for several months that a low VIX is a sign that U.S. stocks are in a bull market rather than being excessively delusional about the obvious challenges ahead,” said Nicholas Colas, co-founder of DataTrek, in a note emailed Monday. “We still believe the next few weeks will be choppy, however.”

The gauge, known by its ticker VIX, has dropped more than 35% so far this year and is trading below its long-term average, according to FactSet data. Its trading levels are derived from options contracts tied to the S&P 500, the U.S. stock benchmark that has rallied 16% in 2023 through Monday.

Last week the VIX made “a new post-pandemic crisis low,” finishing below 13 on Sept. 14 in a “rare occurrence” for the index that was a positive sign for stocks over the next three months, Colas’s note shows. That’s even if it suggests near-term “choppiness” will continue, he said.

On Monday the VIX closed at 14, well below its long-run average of around 20. The measure ended Sept. 14 at 12.8.

“At first glance, this makes little sense,” Colas said. “The VIX is supposed to be Wall Street’s ‘Fear Index’ and it would appear “there’s plenty to be fearful of just now.”

‘Cloudy picture’

Colas cited several areas of concern, including uncertainty surrounding inflation, the recent jump in oil prices
CL00,
+1.08%
and “a cloudy picture” of how long the Fed Reserve will keep interest rates elevated, for his rationale as to why investor might feel fearful.

The Fed has been trying to slow the rise in the cost of living in the U.S. via its restrictive monetary policy, lifting its benchmark rate aggressively over the past 18 months.

There also has been the recent climb in Treasury rates that has weighed on stocks lately, with 10-year Treasury yields looking “set on making new decade-plus highs,” said Colas.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
finished Monday at 4.318%, according to Dow Jones Market Data. That’s around levels seen in late 2007, FactSet data show.

‘Seasonal peaks’ in volatility

The VIX had kicked off 2023 trading below its long-run average, with Colas saying in January that it was looking a lot more like 2021, a year in which stocks rallied, rather than 2022, when equities tanked as the Fed rapidly hiked rates.

See: Wall Street’s ‘fear gauge’ VIX shaping up more like 2021 than 2022, as U.S. stocks rally this year, says DataTrek

Meanwhile, September and October are known for “seasonal peaks in equity market volatility,” according to Colas.

U.S. stocks have slumped so far this month, after falling in August. The S&P 500, which dropped 1.8% last month, is down 1.2% in September through Monday, FactSet data show.

The S&P 500
SPX
closed 0.1% higher on Monday while the Nasdaq Composite
COMP
and Dow Jones Industrial Average
DJIA
each finished about flat, as investors digested fresh data showing a drop in confidence among homebuilders this month amid elevated mortgage rates.

Stock-market investors also have been monitoring the U.S. Treasury market’s inverted yield curve, or when shorter-term yields climb above long-term rates, as that historically has preceded a recession.

There’s also some concern over the increased popularity of zero-day options in the stock market, as “you’d think their growing usage would push anticipated volatility higher, not lower,” Colas said.

“We doubt options desks have just walked away from trading 30-day options” on S&P 500 futures, he said. “If there is money to be made in a financial asset, someone invariably trades it.”

The Cboe Volatility Index measures 30-day expected volatility of the U.S. stock market.

“What the ultra-low VIX is telling us is that none of these concerns matter enough to offset a fundamentally strong picture for U.S. corporate earnings and the belief that the Federal Reserve is largely done hiking rates,” said Colas. “Equities are dismissing the possibility of a recession over the next 1-2 years, no matter what an inverted yield curve has historically said on that point.”

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September 18, 2023
This signal for U.S. stocks bodes well for a rally as some stability returns to the banking sector

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The U.S. stock market has been flashing an important signal that suggests concerns about the banking sector have dissipated after the sudden collapse of Silicon Valley Bank earlier in March.

The Cboe Volatility Index
VIX,
-1.68%,
a gauge of expected volatility in the S&P 500 index, dropped below the 20 level last week for the first time since March 8, suggesting a return to a lower risk environment that prevailed before Silicon Valley Bank first announced it had to sell securities to strengthen its deteriorating financial position.

The index, often referred to as Wall Street’s “fear gauge,” was down 1.7% at 18.70 on Friday after rising above 30 on March 13, the first trading day after regulators announced emergency measures to stem fallout from Silicon Valley Bank’s failure.

“It’s not a normal volatility environment,” said Johan Grahn, head ETF market strategist at AllianzIM. “We’ve spent 95% of trading days in the past 12 months above 20, while we were above 20 only 15% of the time in the 8-year period before the pandemic-driven volatility started in February of 2020.”

He also noted the VIX topped 30 in one of five days over the past 12 months on average, but only one in 100 days over the same 8-year period before the pandemic.

“Now we’re living in those periods as if it’s normal, but it’s not normal based on that history,” Grahn said.

Other market analysts also said investors should beware of what comes next.

Interest rate cuts in 2023 could signal a tanking economy

The three major U.S. stock indexes ended the month on a positive note with the S&P 500
SPX,
+1.44%
gaining 3.5% and the Dow Jones Industrial Average
DJIA,
+1.26%
up 1.9%, according to Dow Jones Market Data. The Nasdaq Composite
COMP,
+1.74%
advanced 6.7% as volatility in banking-sector stocks ignited a rush into the technology sector.

See: Are tech stocks becoming a haven again? ‘It’s a mistake,’ say market analysts.

For the quarter, the Nasdaq Composite rose 16.8%, its best quarterly gain since at least the fourth quarter of 2020, according to Dow Jones Market Data. The S&P 500, meanwhile, rose 7%, and the Dow advanced 0.4% in the first three months of 2023.

“Those worst fears have been taken off the table, at least for the time being. I think you’re just seeing a reflection in the markets of that fact,” Grahn told MarketWatch via phone.

“Fed Chairman Jerome Powell came out and started flexing his dovish wings a little bit by taking the banking issues into consideration and now leading the market to believe that maybe he will slow down what previously was communicated as more aggressive rate increases,” he said.

Stress in the banking sector and a possible credit squeeze has led markets to reprice expectations of future monetary tightening by the Federal Reserve. Traders’ bets are tilted toward a pause in interest rate increases in May, with odds of a 25-basis-point increase at 49%, according to CME FedWatch tool.

However, Grahn thinks if investors expect rate cuts will happen later this year, that could suggest the economy will tank “very soon” and in a “very painful way.”

Investors are effectively saying “there will be so much pain coming through the system so that the Fed cannot make an argument that holds water for why they want to keep the rates high,” said Grahn. “The risk sensitivity between what the market is pricing in terms of rate increases and where the Fed is telling the market that they’re going to be is way too wide. And the way that the market can be right is if we have a disastrous couple of months ahead of us.”

See: 2023 has been bad for the bears. Here are 5 reasons why it’s going to get even worse.

Liquidity spigot, back on

David Waddell, CEO and chief investment strategist at Waddell & Associates, said it has been past bailout reassurances that have stabilized financial markets, because they neutralize the threat of banking stress.

“Once the Fed turned on the ‘liquidity spigot’ and softened their rhetoric, the market took off, because while crises may destroy investor capital, bailouts create even more,” Waddell told MarketWatch in a phone interview.

It also bolsters the case for a shallow recession, he said, because the Fed has shown a tendency to over medicate. “The ‘patient’ will be fine,” Waddell said.

After Silicon Valley Bank failed earlier this month, U.S. Treasury Secretary Janet Yellen ruled out a return to broadscale federal bailouts for banks and emphasized the situation was very different from the 2008 financial crisis, which resulted in unprecedented measures to rescue the nation’s biggest banks.

See: Two-year Treasury yields sees biggest monthly drop since 2008 after bank turmoil

Big moves in Treasurys

U.S. Treasury yields tumbled in March with two-year rates
TMUBMUSD02Y,
4.101%
posting their biggest monthly yield drop since January 2008. The yield on the two-year Treasury note traded at 4.06% on Friday, down 73.5 basis points in March, according to Dow Jones Market Data.

“So far, equities are holding up and economic data has not materially faltered, but I can say with confidence that moves of this magnitude in the Treasury market are not typically signals of smooth sailing ahead,” said Liz Young, head of investment strategy at SoFi.

The ICE BofA MOVE Index, which measures the implied volatility of the U.S. Treasury markets rallied to 198.71 in mid-March, its highest level since 2008, according to FactSet data.

“At the very least, they’re indicating that the uncertainty around Fed policy has risen. Not only due to the recent fears in the banking system — but to the unclear end to the Fed’s hiking cycle.”

Earnings reports, March jobs data ahead

Waddell said investors shouldn’t rely too heavily on a few week’s gains in U.S. stocks, but thinks market sentiment could improve in April due to surprise in the “resilience of earnings and the robustness of them in the recovery.”

However, John Butters, senior earnings analyst at FactSet, said there has been larger cuts than average to EPS estimates for S&P 500 companies for the first quarter of 2023, given the continuing concerns in the market about bank liquidity and a possible broader economic recession.

The estimated earnings decline for the index is 6.6% for the quarter. If that is the actual decline, it will mark the largest earnings decline reported by the index since the second quarter of 2020, Butters said in a Friday note.

Several Federal Reserve speakers are on deck for next week, but the other big thing to watch will be the monthly jobs report for March from the U.S. Labor Department on Friday.

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April 2, 2023
Asian stocks tumble after Credit Suisse takeover

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BEIJING (AP) — Asian stock markets fell Monday after Swiss authorities arranged the takeover of troubled Credit Suisse amid fears of a global banking crisis ahead of a Federal Reserve meeting to decide on more possible interest rate hikes.

Shanghai, Tokyo and Hong Kong declined. Oil prices retreated, and U.S. equity futures were tilting lower after initially rising on the takeover news.

Swiss authorities on Sunday announced UBS would acquire its smaller rival as regulators try to ease fears about banks following the collapse of two U.S. lenders. Central banks announced coordinated efforts to stabilize lenders including a facility to borrow U.S. dollars if necessary.

Investors worry banks are cracking under the strain of unexpectedly fast, large rate hikes over the past year to cool economic activity and inflation. That caused prices of bonds and other assets on their books to fall, fueling unease about the industry’s financial health.

“Investors are waiting to see where the dust settles on the banking saga before making any bold moves,” Stephen Innes of SPI Asset Management said in a report.

The Hang Seng
HSI,
-2.65%
in Hong Kong lost 3% to 18,920 and the Nikkei 225
NIK,
-1.42%
in Tokyo shed 1.2% to 26,990.25.

The Shanghai Composite Index
SHCOMP,
-0.48%
lost 0.2% to 3,241 after the Chinese central bank on Friday freed up additional money for lending by reducing the amount of money commercial are required to hold in reserve. Hong Kong shares of HSBC
5,
-6.23%
dropped over 6%.

The Kospi
180721,
-0.69%
in Seoul retreated 0.6% to 2,382.03 and Sydney’s S&P-ASX 200
XJO,
-1.38%
lost 1.4% to 6,900.00.

India’s Sensex opened down 1.1% at 57,341.79. New Zealand and Southeast Asian markets also declined.

The Swiss government said UBS will acquire Credit Suisse for almost $3.25 billion after a plan for the troubled lender to borrow as much as $54 billion from Switzerland’s central bank failed to reassure investors and customers.

U.S. regulators have also sought to calm fears over threats to banking systems. The Federal Reserve said cash-short banks had borrowed about $300 billion from the Federal Reserve in the week up to Thursday.

Separately, New York Community Bank
NYCB,
-4.66%
agreed to buy a significant chunk of the failed Signature Bank in a $2.7 billion deal, the Federal Deposit Insurance Corp. said late Sunday. The FDIC said $60 billion in Signature Bank’s loans will remain in receivership and are expected to be sold off in time.

Concerns persist about other lenders with shaky finances. Credit Suisse is among 30 institutions known as globally systemically important banks. Ahead of its takeover, Wall Street’s benchmark S&P 500 index
SPX,
-1.10%
lost 1.1% on Friday to 3,916.64.

Shares of First Republic Bank
FRC,
-32.80%
sank nearly 33% to bring their plunge for the week to 71.8%.

The Dow Jones Industrial Average
DJIA,
-1.19%
lost 1.2% to 31,861.98. The Nasdaq Composite
COMP,
-0.74%
fell 0.7% to 11,630.51. Dow futures
YM00,
-0.70%
fell 0.3% early Monday, while S&P 500 futures
ES00,
-0.60%
and Nasdaq-100 futures
NQ00,
-0.33%
were steady.

The unexpectedly large, fast rate hikes by the Fed and other central banks to cool inflation that is close to multi-decade highs have caused prices of bonds and other assets on their books to fall.

Traders expect last week’s turmoil to push the Fed to limit a rate hike at its meeting this week to 0.25 percentage points. That would be the same as the previous increase and half the margin traders expected earlier.

A survey released Friday by the University of Michigan showed inflation expectations among American consumers are falling. That matters to the Fed, which has said such expectations can feed into virtuous and vicious cycles.

In energy markets, benchmark U.S. crude
CL.1,
-3.27%
sank 93 cents to $64.81 in electronic trading on the New York Mercantile Exchange. The contract fell $1.61 on Friday to $66.74. Brent crude
BRN00,
-3.29%,
the price basis for international oils, declined $1.05 cents to $71.92 per barrel in London. It retreated $1.73 the previous session to $72.97.

The dollar
DXY,
+0.13%
gained to 131.83 yen from Friday’s 131.67 yen. The euro
EURUSD,
-0.11%
declined to $1.0676 from $1.0681.

MarketWatch contributed to this report.

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March 19, 2023
Did 2022 break Wall Street’s ‘fear gauge’? Why the VIX no longer reflects the sorry state of the stock market

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U.S. stocks are about to cap off their worst year since 2008. But investors wouldn’t know it by glancing at what’s often referred to as Wall Street’s favorite fear gauge, which has recently failed to reach new heights as stocks tumbled to fresh lows.

The Cboe Volatility Index
VIX,
-3.16%,
better known as the VIX, is on track to finish 2022 not far off its long-term average despite widespread pain across markets. The VIX, based on trading in S&P 500 index options, serves as an indicator of expected volatility in the index over the coming 30-day period.

After topping out at 36.45 on March 7, it repeatedly failed to make new highs for the year, according to data from FactSet, even as stocks tumbled to their lowest levels in years in June and again in September and October.

Nicholas Colas, co-founder of DataTrek Research, highlighted the phenomenon in several research notes to his clients this year.

Not only is the S&P 500 on track to finish the year down roughly 20%, 2022 has also been the most consistently choppy year for stocks in more than a decade by at least one measure.

The index has recorded 46 moves of 2% in either direction since the start of the year, the most since 2009, according to Dow Jones Market Data — narrowly surpassing the number from 2020. That’s roughly four times the 10-year average of 11.3 per year.

The VIX fell 3% on Thursday to 21.46 in afternoon trading as the S&P 500
SPX,
+1.75%,
Dow Jones Industrial Average DJIA and Nasdaq Composite COMP all headed for daily gains after the Nasdaq booked its lowest closing level of the year on Wednesday.

A ‘really terrible year’

Perhaps counterintuitively, Colas and others see the subdued VIX as a potential cause for concern. This is because a spike in the fear gauge has typically preceded stock-market bottoms in recent decades.

Colas and others refer to the phenomenon as “capitulation,” meaning that a surge in the VIX means that sentiment in the market has grown so dire that the beginning of a market turnaround is likely at hand.

The VIX surged above 80 before stocks bottomed out in March 2009, and again in March 2020. Colas has said in the past that levels above 40 are needed to signal that capitulation is at hand. Volatility typically rises fastest when stocks are falling, market strategists said.

The lack of a clear signal that bears are reaching a point of exhaustion has made some analysts wonder if the market’s lows might still lie ahead.

See: Wall Street’s ‘fear gauge’ still not signaling stock-market bottom is near, analysts say

“Volatility seems too low,” said Danny Kirsch, head of the options desk at Piper Sandler, during a phone interview with MarketWatch this week. “I’d say the VIX should be in its mid-to-high 20s, as opposed to barely 20.”

“We had a really terrible year. There was massive wealth destruction, and yet the cost to hedge going forward hasn’t really changed,” Kirsch added.

Is the VIX ‘broken’?

Comparing the VIX’s 2022 performance to 2008 recently led Michael Kramer, founder of Mott Capital, to conclude that the gauge may be “broken” in a tweet published on Wednesday.

Others have pushed back against this notion, arguing that while the VIX has been “somewhat low,” it’s still elevated compared with recent market history.

To wit, the VIX’s current level is still more than twice its record low from Nov. 3, 2017, when the volatility gauge closed at 9.14, according to data from FactSet. This occurred at a time when U.S. stocks were drifting consistently higher. The S&P 500 went on to finish 2017 with a gain of more than 20%.

“It’s been a high VIX year, just not as high as some people think it should have been, given volatility elsewhere in markets,” said Rocky Fishman, the head of index volatility research at Goldman Sachs Group Inc.

The VIX has also maintained its strong inverse correlation to the S&P 500, as Callie Cox, a U.S. equity analyst at eToro, pointed out. Data shared by Cox showed that the VIX has moved inversely with the S&P 500
SPX,
+1.75%
roughly 80% of the time since its inception in 1990.

Why so low?

So, why has the VIX been so subdued? Cox, Kirsch and others rattled off several factors that might be contributing to its malaise.

One popular explanation is that as institutional investors dumped stocks and shifted more of their portfolios to cash this year, they were left with smaller levels of long-equity exposure in need of hedging.

“VIX is basically a measure of demand for hedges by the biggest investors in the market. But when institutional investors are liquidating their equity positions, they no longer have a need for the associated hedges, so they unwind those positions in the derivatives markets and ultimately that pressures” the VIX, said analysts at Sevens Report Research in a note entitled “Is the VIX broken?” published earlier this month.

Also, a generally bearish outlook for markets means that institutional investors are “fairly well hedged,” Kirsch said, which helps keep a lid on the VIX when large selloffs materialize.

Others cited traders’ increasing reliance on short-term options for tactical trades.

While the VIX is designed to interpret increased options buying as a sign that investors are growing more anxious, it specifically incorporates only options with roughly one month left until expiration.

This has become an issue as trading in shorter-dated options, including contracts with less than one day left until they expire, has surged in popularity this year, according to data from Goldman Sachs.

Trading in zero-day to expiration S&P 500 options has surged in the fourth quarter to more than four times its average level from 2021, according to data shared by Goldman in a research note dated Dec. 15.

“The VIX doesn’t accurately measure fear these days because there’s so much trading in short-dated options,” said Steve Sosnick, chief strategist at Interactive Brokers.

Is a blowup looming?

The question for investors now is whether a subdued VIX might lead to a volatility-inspired reckoning for markets, like what happened in February 2018, when a popular short-volatility trade rapidly unwound, contributing to the death of short-volatility products like the VelocityShares Daily Inverse VIX Short Term ETN.

It’s possible that markets could undergo a volatility-driven “washout” as some of the trades helping to suppress the VIX are unwound, Kirsch said. Although he doesn’t expect the impact on markets to be as severe as it was in 2018 or 2020, he told MarketWatch.

But whatever happens, it’s possible analysts who rely on the VIX to inform their trading might need to adjust their expectations around what constitutes a capitulation signal, Cox told MarketWatch. Still, this doesn’t necessarily mean that the VIX is “broken.”

“It’s still measuring what it’s intended to measure,” she said. “This is more a story of how much the options market has evolved over the past few years.”

“People just aren’t using classic one-month options to hedge or speculate as much. Investors are choosing to get more precise with their options strategies, which makes a lot of sense — it’s cheaper and more adaptable,” Cox added.

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December 29, 2022
Wall Street’s ‘fear gauge’ is flashing a warning that stocks could be about to fall off a cliff

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The CBOE Volatility Index has captured the attention of market analysts this year as a key relationship between Wall Street’s “fear gauge” and the S&P 500 index appears to have broken down.

Typically, the VIX
VIX,
-0.27%,
a popular measure of the stock market’s expectation of volatility based on S&P 500 index options, and S&P 500 index itself
SPX,
-0.01%
share an inverse correlation. When the S&P 500 falls to new multiyear lows, like it did early this week, the VIX climbs to new highs. However, this relationship has broken down this year. Most recently, the VIX failed to take out its highs from June as the S&P 500 logged its lowest closing low since September 2020 this week.

A similar pattern emerged as stocks fell to what were then their lowest levels of the year in June.

The dynamic can be seen in a chart produced by Katie Stockton, a market strategist at Fairlead Strategies, which can be found below.

FAIRLEAD STRATEGIES

But this trend of lower highs for the VIX isn’t the only technical indicator that has caught market strategists’ attention.

The VIX is on the cusp of achieving a “golden cross” — a term used by market technicians to denote when the 50-day moving average of a given asset, exchange rate or index climbs above the 200-day moving average.

In the past, these “golden crosses” have preceded sharp downturns in stocks. One occurred in September 2008, just before stock-market volatility exploded in response to Lehman Brothers’ bankruptcy, according to Tyler Richey, co-editor of the Sevens Report and a stock-market strategist who closely follows the Vix.

“Using history as a guide, this is the kind of tipping point where things could get ugly,” Richey said.

The previous VIX “golden cross” occurred nearly one year ago in December 2021. The S&P 500, Dow Jones Industrial Average
DJIA,
+0.19%
and Nasdaq Composite
COMP,
-0.08%
reached their cycle peaks little more than one month later.

As of the close of trading on Tuesday, the 50-day moving average for the VIX stood at 25.76, while the 200-day moving average stood at 25.86.

While they’re not as closely followed as the VIX, the CBOE Nasdaq Volatility Index and the CBOE Dow Jones Industrial Average Volatility Index are also on the cusp of reaching the “golden cross” milestone.

Stockton said investors “shouldn’t find any solace” in the latest technical signals emanating from the VIX. However, she told MarketWatch that she doesn’t typically follow the golden cross indicator since the VIX is an “oscillating” gauge not a “trending” one.

As for what might be driving the pattern of lower highs in the VIX, Richey said it could be a result of “real money” investors like mutual funds and pension funds liquidating their holdings, instead of using options-based hedging strategies to protect their downside risk.

As of Wednesday morning, the Vix and other stock-market volatility gauges were mixed as the S&P 500 and the Dow
DJIA,
+0.19%
shook off early losses, while the Nasdaq
COMP,
-0.08%
remained mired in the red.

Looking ahead, Stockton said she believes 35 is the next key “resistance” level for the VIX, which is just below the index’s highs from June.

Should the volatility gauge surmount that level, Stockton said she wouldn’t expect the selling in stocks to stop until the VIX hits 50.

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October 12, 2022