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NEW YORK (Reuters) – Investors hoping for calm to return to U.S. stocks will not find much comfort in Wall Street’s fear gauge known as the VIX, which shows some market participants are bracing for more turbulence despite this week’s bounce.
The Cboe Volatility Index (VIX) is down nearly 20 points from its record closing high hit earlier this month but remains far above its usual levels. The index rose to 64.69 in afternoon trading as U.S. stocks fell Friday.
The persistent elevation of the index, which shot to its highest level since 2008 as markets plunged, sounded a discordant note during the rally earlier this week, which took the S&P 500 nearly 18% higher from Monday’s close to Thursday’s close.
“I do think the VIX is too high right now,” said Gene Goldman, chief investment officer at Cetera Investment Management. “It’s pricing in 4% stock moves per day for the foreseeable future.”
The still-high VIX reflects both the aftershock of the massive price swings investors have endured as well as deep uncertainty surrounding the trajectory of the coronavirus and its economic fallout.
While unprecedented stimulus from the Federal Reserve and a $2.2 trillion relief bill expected to pass the House of Representatives have bolstered hopes of averting worst-case economic scenarios, forecasts remain bleak. Goldman Sachs (NYSE:GS), for instance, has projected a 24% year-over-year drop in U.S. gross domestic product in the second quarter as the outbreak halts business activity throughout much of the country.
“In this respect, a VIX still hovering around 60 provides a much more sobering and fair assessment of the level of uncertainty present in markets and the global economy,” analysts at Fathom Consulting wrote in a note to clients.
Past bouts of extreme volatility have often taken some time to subside. The VIX was just below 50 when stocks bottomed in March 2009 after a 57% drop from their October 2007 highs during the financial crisis.
It may take months for the VIX to ease back to its usual levels, said Matt Amberson, principal at ORATS.
Realized volatility on the S&P 500 (SPX) – a measure of actual moves on the index over the past 30 days – was at 97.4% on Friday, according to data from options analytics provider Trade Alert. By comparison, the VIX does not seem so high.
“Vol is very fair given the kind of moves that we’re having,” said Henry Schwartz, founder of Trade Alert.
Other measures, however, signal that some investors believe the selling may have already peaked.
For options on the SPDR S&P 500 ETF Trust (P:SPY), implied volatility, bid-ask spreads and skew have all drifted lower after surpassing 2008 levels last week, Amberson said.
Implied volatility reflects investor expectations for market gyrations over the next month. The bid-ask spread is the gap between what sellers say they want to receive for securities and what buyers say they will pay. Skew measures the demand for puts, used to protect against downward moves, in comparison to calls, used to position for upside.
A better indicator of volatility expectations may be VIX futures rather than the VIX itself, which is not traded, said Don Dale, chief risk strategist at Equity Risk Control Group.
Front-month VIX futures (VXc1), which expire in mid-April and reflect expectations for volatility in the month following that date, have fallen even more significantly than the VIX in the past week-and-a-half. They were last trading at 51.45.
“Based on the term structure of the VIX, traders are expecting the market to be less turbulent as we move forward toward the summer,” Dale said. “But VIX traders are not pricing in an immediate reduction in turbulence. They’re expecting April to still be volatile.”
