As the sell-off in global stock markets intensified last week, Wall Street's "fear index" VIX soared, even reaching levels not seen since the worst period of the financial crisis.
When the VIX, or Cboe Volatility Index, rises, it typically means traders are adding protection for a short-term sell-off. But market strategists say it could also be a sign that the worst of the pain is over.
The VIX surged 134% to 55 early Monday, surpassing its previous 115% gain on Feb. 5, 2018, when the index more than doubled as some exchange-traded products that bet against volatility were forced to push up VIX futures prices, sending shudders through the market. Traders dubbed the day “Volmageddon.”
The VIX index calmed down slightly late Monday, but still posted its biggest one-day gain since the "volatility apocalypse" and its highest close since April 2020.
Jonathan Krinsky, chief market technician at BTIG, noted that something interesting happened when the VIX reached its highs (early Monday).
The spread between the spot VIX and its next-month futures contract briefly fell to minus 30 points, surpassing the lowest point during the worst of the coronavirus sell-off. Krinsky said that was the first time that had happened, based on closing prices, since October 2008.
Klinsky said in an email that the surge in the spot VIX relative to its next-month futures contract suggests “significant demand for immediate protection.” In other words, it’s a sign that investors are panicking and willing to pay for protection against more losses in the coming weeks.
Typically, stock market corrections don’t bottom until the spread between the spot VIX and its next-month futures contract inverts by at least 10 basis points or more at the close, Krinsky said.
The spread between the spot VIX and its next-month futures contract has already started to cool after the market opened on Monday and has narrowed to -15 in recent trading.
In fact, signs that investors are entering panic mode often coincide more with the end of a sell-off than the beginning. Some point to a high VIX as a sign that stocks are looking more attractive, even if there could be more losses in the short term.
“Given that our base case remains a soft landing for the U.S. economy, we think the risk-reward for U.S. equities looks more attractive and contrarian bullish signals are starting to emerge,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management. “For example, the VIX surged to more than 20, suggesting a favorable outlook for equity returns.”
As of Friday, VIX options traders had already begun looking to profit from their bets on rising volatility. They also opened new short bets on the VIX index.
Options volume data from the Chicago Board Options Exchange's global markets showed that contracts tied to the VIX index traded near a record 3.4 million contracts on Friday, with the largest increase in put contracts.
Article forwarded from: Jinshi Data
