A surprising lack of panic in the US stock market, as measured by Wall Street’s “fear gauge,” is preventing some investors from bottoming out in an already brutal equity selloff.
Since 1990, the Cboe Volatility Index .VIX has averaged 37 at market lows, down from its most recent level of around 32.
Some investors believe that means stocks have yet to see the scary selling crescendo that has sometimes accompanied market lows, even though the S&P 500 has already fallen nearly 20% from its all-time high, a level that would confirm a bear market.
“The sentiment is negative there but there’s no real fear, there’s no sense of panic,” said Kris Sidial, co-founder of volatility arbitrage fund The Ambrus Group. “The only thing you don’t see is surrender.”
The VIX – which measures the anticipation of stock market volatility as expressed by option prices – is well above its long-term median level of 17.6.
Many investors believe volatility is likely to remain elevated as markets digest a hawkish Federal Reserve, runaway inflation and geopolitical uncertainty stemming from the war in Ukraine.
While the VIX doesn’t need to move higher before calm returns to markets, the index’s inability to climb much above the mid-30s may be a sign that selling stock isn’t exhausted yet, making it more dangerous for those looking to buy on weakness, market participants said.
“I just don’t think we’ve seen this kind of bottoming event,” said Steve Sosnick, chief strategist at Interactive Brokers.
The VIX had posted a close high of 82.69 during the March 2020 COVID-19 selloff, after which the S&P 500 more than doubled as the Fed cut rates and implemented other policies. easy money to support the economy. The index reached 36.07 in 2018, when stocks stopped entering a bear market due to concerns over tighter Fed policy, and peaked at 80.86 during the Great Recession.
“I would like to see more panic and an absolute dumping of 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 options contracts – may be relatively subdued is that the gradual sell-off has left investors lighter on their equity allocation.
Investors’ overall positioning in equities has slipped to the lowest levels since the COVID-19 sell-off in 2020, Deutsche Bank analysts say.
Meanwhile, options positioning on the S&P 500 and VIX shows a market very well protected against downside, said Brent Kochuba, founder of analytical service SpotGamma. With defensive positions in place, investors are in no rush to buy more put options even as the market declines, Kochuba said.
The VIX is far from the only sign investors look at when trying to determine whether markets have bottomed, and at least one measure of volatility – one-month historical volatility – shows that markets can be closer to a turn than the VIX indicates.
This measure of unrest stands at 29, its highest level since July 2020 and about 4 points above where it was on the day the S&P 500 hit its lowest level in the last 54 instances of unrest. corrections and bear markets dating back to 1928, according to a Reuters analysis.
Still, some believe that any rally in equities is unlikely to last without a big “collapse” in volatility.
“What you have now are people hanging on and hoping for a rebound,” said Patrick Kaser, portfolio manager at Brandywine Global Investment Management.
To mark the end of the selloff, however, the market needs a “highly publicized moment of failure and pain,” Kaser said.
Source: Reuters (Reporting by Saqib Iqbal Ahmed; Additional reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Sam Holmes)