Fear Gauge at 11-Week Low May Be Giving Stocks the ‘All Clear’

(Bloomberg) — The fall in U.S. equity volatility to a three-month low is being taken as a positive sign for stocks by market watchers, rather than one of complacency.

The slid a fifth straight day Tuesday to 13.54, the lowest since July 29. In the three times this year Wall Street’s so-called fear gauge dropped below 14 after spending a few weeks above it, shares rallied further twice, according to Sundial Capital Research Inc. founder Jason Goepfert.

“Historically, it has been more of a positive than a negative,” he wrote Tuesday about the VIX’s move. “It’s not so low that it has proven to be a sign of complacency.”

Looking back further, among about 30 instances since 1990 when the VIX declined below 14 for the first time in more than three weeks, only one of the signals preceded a loss over the next six to 12 months, he said.

After a relatively calm September, investors were whipsawed at the start of October as U.S.-China trade tensions resurfaced and global economic data weakened. The S&P 500 Index has moved at least 1% on six occasions this month, versus only two 1%-plus moves in the whole of September.

For Schaeffer’s Investment Research, the drop in the gauge of equity swings is also a signal of upside for stocks.

“The ‘all clear’ signal for a near-term decline in volatility triggered as of Friday’s close, as the VIX closed below its 200-day moving average,” said senior vice president of research Todd Salamone, in a note Monday.

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