Cboe Global Markets

Inside Volatility Trading: More Chaos Ahead – Or a Bottom? What Does the VIX Index Say?

Scott Bauer
▬
May 23, 2022

The VIX® Index – which measures the expectation of stock-market volatility as expressed by options prices – stands far above its long-term median level of 17.6. Yet, as discussed in a recent Reuters article, what some investors might view as lack of panic in the U.S. stock market, at least as measured by Wall Street’s "fear gauge," may be keeping those investors from putting cash to work after a massive selloff. The VIX Index can spike when investor concerns are heightened by events like the Covid-19 pandemic, the angst of the Fed raising rates, or the ongoing geo-political risk between Russia and Ukraine. Investors and traders alike have been on a roller-coaster ride, but some investors may believe that the VIX Index has yet to convincingly signal that the sell-off has reached its end.

Since 1990, after major market declines, the Cboe Volatility Index® (the VIX® Index) has averaged a reading of 37 compared to its most recent level of approximately 30. Though the VIX Index has hit this level multiple times since late February, most recently at the beginning of May, it has yet to break through and hit that level of “capitulation” that some investors may be waiting for. Some investors may believe that means the true “I give up” scenario that sometimes accompanies past market bottoms has yet to be seen, despite the S&P 500 Index having fallen almost 20% from its all time high. This is a level that would put the index into bear market territory. While it is not necessary for the VIX Index to shoot higher before calm returns to markets, the current landscape may make it more difficult to buy on further weakness.

In March 2020, during the COVID-19 selloff, the VIX peaked out at its all-time high close of 82.69. The S&P 500 index subsequently more than doubled as interest rates were slashed and other easy money policies helped support the economy. The VIX Index topped out at 80.86 during the Great Recession and hit 36.07 in 2018, when stocks stopped just short of entering a bear market on worries over tighter Federal Reserve monetary policy.

Sector 500-Trading Day Forward Returns by Rolling 14-Day VIX

(1998 – Current)

Source: YCharts (note: the Sector Select SPDR ETFs are used to represent sectors)

You can see that the opportunities when the VIX Index is above the mid-30’s are uncommon, but we have been in that general area for the last month. Just because the VIX Index moves above that level doesn’t mean it can’t go higher and it’s not necessarily an indication of a bottom either, but historically this can offer the possibility to capture above average gains moving forward as reflected by the chart above.

The VIX Index uses calendar day annualization so a VIX Index at 28 represents a daily move in the S&P 500 Index of approximately 1.47% (28/SQRT of 365), or 59 points. However, the S&P 500 Index has moved more than that in a majority of the sessions over the last few weeks.

The VIX Index is calculated based on at-the-money S&P 500 index option contracts. Reuters notes that one reason the VIX may not be breaking out signaling a possible capitulation is that the current selloff, though steep, has been a gradual one. This may have allowed investors to exit positions along the way. According to analysts at Deutsche Bank, investors' aggregate equity positioning has slipped to the lowest levels since the 2020 COVID-19 selloff.

VIX Index Closing Value

Source: Refinitive

The markets are still trying to digest rising interest rates, seemingly unstoppable inflation and the continued war in Ukraine. This has frayed consumer confidence and has led investors to believe that volatility is likely to remain elevated for several months, if not longer. The S&P 500 Index has dropped below major technical support areas while the NASDAQ-100 Index remains solidly in bear-market territory and has fallen to a new 18-month low.

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