Wall Street's "Fear Gauge" Flashes Warning That Stocks Might Be Headed off a Cliff

Dow Jones2023-01-18

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 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 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.

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Comments

  • Deonc
    2023-01-18
    Deonc
    ok
  • Karen333
    2023-01-18
    Karen333
    Misleading. Low box means low vol which means lower probability of major fluctuations. CS are not saying that low acid means we are going to see a higher chance of drop. They are saying less preparedness or anticipation of drop. I hate articles that plays on reasoning to get a flashy title to attract readers.
  • crtyn
    2023-01-18
    crtyn
    Ok
  • Guavaxf30
    2023-01-18
    Guavaxf30
    Don't know how reliable VIX is but Always better to heed warnings and be careful. 
  • Fiona888
    2023-01-18
    Fiona888
    Yes
  • huathuatking
    2023-01-18
    huathuatking
    Ok
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