What is the VIX telling us

In amongst the explosive price action the past six weeks, there have been a few short term reliable patterns for traders to reference. One such example is since the S&P 500 commenced falling from its 3397.50 high in February, five of the six re-opens on a Monday morning have featured the S&P 500 futures “gapping” lower on the re-open.

Essentially a “gap lower open” represents an immediate lower repricing of risk assets following negative news headlines over the weekend. In recent weeks the gaps have followed news relating to the global spread of COVID-19, intermixed with bearish headlines for crude oil.

Following this weekend’s better news that European COVID-19 hotspots, Spain, Italy, and France reported lower death tolls as well as a levelling off in new COVID-19 cases in New York, the S&P 500 has opened this morning unchanged, bucking the trend of lower re-opens.

A feat that is more notable as crude oil futures fell sharply on their open after Russia and OPEC postponed a crucial meeting to discuss production cuts. The price action in the S&P 500 is supportive of the view that markets have turned a corner, both in terms of price and volatility.

One of the most commonly looked at gauges of volatility is the Chicago Board Options Exchange (CBOE), Volatility Index (VIX), which measures the market's expectation of 30-day forward-looking volatility and is often referred to as the markets “Index of Fear”.

As can be seen in the chart below, the VIX spiked above 85 in Mid-March to near to its Global Financial Crisis (GFC) high before falling back below 50. While we think it is likely the VIX has seen its high for this episode, it’s unlikely that it continues to fall back to the benign levels it was trading at the start of the year.

Instead, the expectation is for the VIX to consolidate in the coming weeks at levels between 55 and 35, representative of the market entering a choppy period of “2 steps forward and 1 ½ steps back” type movements.

Source Tradingview. The figures stated areas of the 6th of April 2020. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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