First time since 1996! The "fear index" signals that the calm period of US stocks will end?
The S&P 500 index and the VIX index rarely rose simultaneously for five days in a row, and the low volatility of U.S. stocks may end early. This article originates from an article written by Jinshi Data, compiled and written by Foresight News.
(Preliminary briefing: U.S. stocks plummeted and sorted out) Nasdaq dived 3.5%, and technology giants fell more than 5%)
(Background supplement: Nomura Securities: The U.S. stock bull market is still supported by the AI narrative, but the risks cannot be ignored)
After the stock market spent one of the calmest summers in years, Wall Street's "fear index" surged again as investors worried that the trade deadlock might further escalate.
The Cboe Volatility Index (VIX), better known as the VIX or Wall Street's "fear gauge," traded as high as 22.76 on Tuesday, its highest intraday level since May 23, when the index traded as high as 25.53, according to Dow Jones Market Data.
By market close, the VIX had retreated significantly from its early highs. The index closed above 20, a level that makes some sense. Since the VIX index was created in the early 1990s, its long-term average has been just below 20. Therefore, investors tend to view this level as the line between the market being relatively calm and starting to look a little panicked.
VIX levels are based on trading activity in options contracts tied to the S&P 500 Index with an expiration date of approximately one month. It is seen as a measure of traders' concerns that the stock market may "take a dive." After all, when markets fall, volatility tends to rise faster.
Looking back, there are signs that investors were starting to feel a little too complacent.
Over the summer, stocks slowly moved higher with little interruption. The quiet trading ultimately pushed the S&P 500's three-month realized volatility last week to its lowest level since January 2020, according to FactSet data and MarketWatch calculations.
Realized volatility is a calculation that measures how volatile a particular index or asset has been over the near term. The VIX, which measures implied volatility, attempts to assess how volatile investors expect the market to be in the near future.
Realized volatility of the VIX and S&P 500 were once lower in tandem, but the two began to diverge around Labor Day.
That could mean a few different things, according to portfolio managers who spoke to MarketWatch. The first is that investors are increasingly using call options rather than actual shares to bet on further gains in the stock market. A call option will pay off if the S&P 500 rises above a predetermined level by a specific time, called expiration date.
It could also mean that some traders are snapping up put options, which act like a form of portfolio insurance. Worried about the various risks that could upend the record-breaking rally at the start of the year, some investors may be tempted to hedge their downside risk while holding on to their stocks to avoid missing out on any further gains.
Signs that markets may be preparing for coming turmoil first emerged in late September. Between September 29 and October 3, the S&P 500 and VIX posted five consecutive trading days of simultaneous gains, according to analysis by Ryan Detrick of The Carson Group. This has not happened since 1996.
Michael Kramer, a portfolio manager at Mott Capital Management, said seeing both the VIX and S&P 500 moving higher is a sign that the market's lull may soon be over.
"The firewood is already there," said Mike Thompson, co-portfolio manager at Little Harbor Advisors.
"You just need that spark to ignite it," said Mott Capital's Cramer.
Though trade tensions are far from resolved, Thompson and his brother, Matt Thompson, also a co-portfolio manager at Little Harbor Advisors Thompson, is keeping a close eye on any signs that could herald an outbreak of larger volatility.
Investors generally blamed the stock market selloff on a renewed escalation in trade tensions.
To the Thompson brothers, Trump’s tariff “dance” is starting to feel a little too familiar to be a real concern. Investors seem to be grasping this pattern: one party upgrades first and then downgrades in order to gain maximum leverage.
In their view, a more legitimate threat to market calm would be turbulence in credit markets. On Tuesday, JPMorgan Chief Executive Dimon warned of potential more credit problems after the bank suffered losses on loans to bankrupt subprime auto lender Tricolor. After a prolonged period of relatively favorable credit market conditions, trouble in this area is likely to worsen.
On Friday, BlackRock and other institutional investors asked to withdraw funds from Point Bonita Capital, a fund managed by investment bank Jefferies, after it suffered heavy losses from the collapse of auto parts supplier First Brands Group.
Matt Thompson said: "We are watching to see if the other boot drops."
