The Dow soared back to a record this week, but Wall Street’s fear gauge also remains elevated
Rising stock indexes suggest investors are breathing a sigh of relief right now. Wall Street’s fear gauge says otherwise, though. Stocks have soared back to records, fueled by optimism about a coming vaccine for the novel coronavirus as well as relief that the election—widely anticipated for months—has passed. The Dow Jones Industrial Average has rallied 12.7% in November, on track for its strongest month since 1987. The S&P 500 has advanced 11% this month and hit a high on Tuesday Although market volatility has edged lower in recent days, the Cboe Volatility Index has hovered above 20 since Feb. 24, marking 194 consecutive trading sessions that it has not closed below that threshold. That is the longest such streak since one ending in 2009 during the financial crisis, according to Dow Jones Market Data. The gauge is based on options prices tied to the S&P 500 and tends to fall as stocks are rising. The VIX at an elevated level signals investors remain cautious despite a stock market that is flying high, with concerns lingering that the volatility that gripped markets earlier in the year could return. It also reflects elevated prices for options bets tied to the S&P 500, which investors often tap to hedge portfolios or make directional bets on stocks. The stretch is remarkable because it includes a period in which U.S. stocks tumbled into a bear market—defined as a drop of at least 20%—before rebounding back toward new highs. Despite the recent ascent for stocks, the elevated VIX signals some anxiety about the market’s path. Since Feb. 24, the S&P 500 has gained about 12.5%.
In six out of eight of the past periods where the VIX hovered above 20 for at least 100 sessions, the S&P 500 had fallen, not risen, according to Dow Jones Market Data.
“There’s still a lot of scars from what happened earlier in the year,” said Chris Murphy, co-head of derivatives strategy at Susquehanna. Some analysts said the elevated VIX has been driven by doubts about the recent stock rally, driving demand for insurance-like contracts through the end of the year to protect recent gains.
“There’s so much uncertainty out there,” said Stuart Kaiser, head of equity derivatives research at UBS Group AG . “Nobody wants to be on the wrong side of this.”
Despite positive news about the vaccine recently, it isn’t clear when it will be distributed and how quickly the economy will bounce back. And of course, it has been a rocky year. There have been more single-day stock moves of at least 3% for the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite—up or down—than in any year since 2008.
There are some signs that traders are positioning for the gauge to snap its streak above 20 and plummet. Leveraged funds like hedge funds recently ramped up wagers that would pay out if the VIX fell. Commodity Futures Trading Commission data show such wagers recently hit their highest level since at least early August. Bearish bets like these on the volatility gauge are akin to bullish ones on stocks.
Meanwhile, there has been a flurry of bullish call options activity tied to the iShares Russell 2000 exchange-traded fund, which tracks shares of small companies. The Russell 2000 is up 20% this month, on track for its best month since its 1984 inception. Investors confident that the economy will continue to improve because of the vaccine have piled into the sector. Nick Note: My dick is hard… Please GOD get it HIGHER… I want to buy a fleet of the new 1000 HP EV Hummers. And then rip that electrics shit out for my solar panels ant put in proper big block! like the ZZ572/620….727 HONEST HORSEPOWER. And the really neat part is i am doing my part to kill the ozone layer and get rid of those left over from the tropic age all those nasty ice caps…