Global markets experienced a steep fall on Monday as a key measure of what CNBC called “expected volatility” within the stock market shot up to its highest level in more than four years, when the coronavirus pandemic delivered its first punch to the world.The Cboe Volatility Index, also known as the VIX, hit above 65 for a brief period of time on Monday, which is an increase of 23 which is where it was last Friday and around 17 a week ago. After noon rolled around it dropped to 32. Better than 65, but not great by any stretch of the imagination.
For weeks we’ve been issuing warning after warning about the instability of the market. Hopefully, people took those articles seriously and have started opening their eyes and preparing for the worst case scenario, a total collapse, which could happen faster than a snap of the fingers.
The Monday morning peak was the highest level the VIX has hit since March 2020, shortly after the Federal Reserve’s emergency actions during the Covid-19 pandemic, according to FactSet. The VIX rose as high as 85.47 in March 2020, according to FactSet. The VIX is calculated based on market pricing for options on the S&P 500. It is designed to be a measure of expected volatility over the next 30 days, and is often referred to as Wall Street’s “fear gauge.”
Jim Carroll, senior wealth advisor with Ballast Rock Private Wealth, said that the size of the initial move on Monday could be a reflection of traders adding protection — or shifting out of short-term options into longer-term ones — during a period when the market struggled to meet that demand.
“It seems obvious, sitting where we sit now with VIX at 34-35 instead of 65, that we say an outside-of-regular-trading-hours squeeze. People were after those puts. They were chasing them. They couldn’t get them. They kept chasing them,” Carroll went on to say late Monday morning. For those who aren’t familiar with the phrase, Put options are a kind of derivative that traders use to add downside protection to their investment portfolios. It’s sort of like insurance.
For quite some time after the COVID sell-off cooled off, the VIX has calmed down, often trading beneath the longer-term average of 20. A few market experts have started speculating that the proliferation of other kinds of derivatives, which includes trading in zero-day-to-expiration contracts, which they believe could be contributing to things.
While spikes in the VIX often coincide with deep market sell-offs, they can also be short-lived and precede a rebound for stocks.
“You have to watch the VIX. When the VIX peaks and starts to roll over and fall down, the recovery can be just as quick,” Fundstrat head of research Tom Lee remarked Monday on CNBC’s “Squawk Box.”
However, Carroll pointed out that the index also cooled during Friday’s session, only to spike over the weekend, and said Monday’s moves should not be viewed as an “all-clear” signal.
“If you just chopped off the long-tail at the top of the VIX candle right now and said, ‘Hey, we’re at 35.’ We’re at 35 relative to 23 on Friday’s close — that’s still a big move,” Carroll commented.
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