Get ready for a market environment characterized by increased volatility.
Editor Thenews24.net
5 min read
Seeing the Cboe Volatility Index (VIX), often referred to as the market’s ‘fear gauge,’ surge past 25 is rare, and hitting 65 is even more unusual. Such a spike indicates heightened anxiety among investors, as reflected in the real-time pricing of S&P 500 Index options. On Monday, the VIX briefly touched 65 before pulling back. These spikes are alarming for investors because they typically mean the S&P 500 is experiencing significant declines, in this case, up to 4.2% intraday. The last time we saw a VIX spike of this magnitude was in 2020 during the COVID-19 market downturn, a period marked by high volatility. We believe we are entering another high-volatility phase, ending the prolonged low-volatility period that preceded it. This shift doesn’t necessarily signal a long-term bearish outlook for the S&P 500, but it does suggest we should brace for more frequent pullbacks and corrections as the market’s upward trend slows.
In May, we alerted our clients and social media followers to the potential for a high-volatility regime, and the monthly VIX chart shows that these periods are generally shorter than low-volatility ones. Since December 2022, following the end of the 2022 bear market, we’ve enjoyed a low-volatility phase, so a temporary break in this cycle shouldn’t be surprising. The new monthly MACD crossover indicates that the VIX might establish a higher baseline for the next nine months or more.
What does this mean for the market and the S&P 500? Elevated volatility often correlates with a more emotionally driven market, suggesting that the S&P 500 will likely see more pullbacks and possibly corrections of 10% or more, with a less steep upward trajectory. The current pullback and a counter-trend signal on the monthly S&P chart from the DeMARK Indicators suggest four months of consolidation. If our long-term trend-following measures for the S&P 500 weaken, we might consider reducing exposure. Otherwise, we generally advise maintaining core long positions while reducing more opportunistic or high-beta exposure. A rebound in the S&P 500, indicated by a VIX pullback, can be used to hedge partial exposure from a top-down perspective.
—Katie Stockton with Will Tamplin
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