Volatility Index Reaches Highest Level since March
The Cboe Volatility Index (VIX) reaches its highest level since March, signaling increased expected volatility in the stock market. Wall Street analysts caution against buying stocks due to weak breadth and underlying market issues.
Troy D. Hanson
October 20, 2023
The Cboe Volatility Index (VIX), also known as Wall Street's "fear gauge," reached its highest level since March on Friday, indicating increased expected volatility in the U.S. stock market. Despite this surge, top Wall Street technical analyst Jonathan Krinsky believes it is not enough to entice contrarians to buy the dip in stocks. The S&P 500 index is currently testing critical support levels, and with underlying breadth issues in the market, caution is advised.
VIX Surges, Breaking a 101-Day Streak
On Friday, the VIX soared to a peak of 21.83, marking its highest intraday reading since March. This follows a streak of 101 trading days without a close above 20 - the longest such run since October 2018.
Breadth Issues and Weak Stock Performance
Despite periodic surges in the VIX, the breadth of the market - determined by the number of stocks gaining versus losing ground - has remained weak. This lack of strength suggests a cautious approach to investing rather than interpreting the VIX spike as a buying opportunity.
The Relationship Between the VIX and S&P 500
Mark Arbeter, president of Arbeter Investments LLC and a technical analyst, highlights that the VIX is not a leading indicator but rather a reflection of the velocity of the S&P 500. When the S&P 500 experiences sudden and significant declines, the VIX rapidly rises. However, a prolonged decline over several days has minimal impact on the VIX.
A Mild Breakout in Volatility
While the VIX has reached its highest level since spring, analysts note that overall volatility remains relatively subdued. It is important to consider that the VIX is currently below its 2022 average of 25.5, suggesting that extreme selling frenzies have not yet occurred.
In conclusion, although the VIX has hit a significant milestone, caution is advised due to underlying market weaknesses and lackluster breadth performance. As the S&P 500 tests essential support levels, contrarians are not swayed to buy the dip at this time.
The VIX, a measure of market volatility, experienced a slight decline on Friday, falling 0.3 points to 21.09 in recent trade. Meanwhile, the S&P 500 dropped 0.5% to approximately 4,254, marking a weekly loss of 1.7%. The Dow Jones Industrial Average also headed for a weekly decline of 1.1%. Despite these losses, the S&P 500 rebounded from its session low after finding support near its 200-day moving average around 4,233.
Analysts attribute Friday's weakness to concerns surrounding the ongoing Israel-Hamas conflict, although the impact on assets has remained relatively subdued thus far. While investors closely monitor oil futures for potential disruptions in energy supplies due to the conflict, the market has not yet seen significant effects on prices, with the oil futures market potentially serving as the biggest risk to both markets and the global economy.
On Friday, Treasurys experienced a rise, resulting in a decrease in yields. However, since the start of the war, Treasurys have undergone sharp sell-offs, failing to attract strong haven bids typically associated with heightened geopolitical tensions. The 10-year Treasury note yield approached the psychologically important level of 5% after reaching another round of 16-year highs earlier in the week.
In addition to these market movements, there are concerns that the Israel-Hamas war may expand beyond Gaza, posing an increased threat to oil supplies. Crude futures are currently on track for weekly gains but remain below the 2023 highs witnessed in late September prior to the October 7 Hamas attack on Israel.
Despite these escalating tensions, traditional safe-haven assets, such as the US dollar, Swiss franc, and Japanese yen, have not experienced significant increases in demand. Enrique Diaz-Alvarez, chief risk officer at financial services firm Ebury, noted the market's lack of response to the conflict, stating that "markets have been extremely blasé so far" and are not factoring in much financial or macroeconomic impact.
In conclusion, while the Israel-Hamas conflict continues to create uncertainties in the market, investors and analysts are closely monitoring key indicators, such as the VIX, oil futures, and Treasury yields, for potential shifts and impacts on various asset classes.