Finance
Wall Street’s fear gauge has fallen to record levels after last week’s massive spike
By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Wall Street’s most watched gauge of investor fear continues its rapid retreat from panic levels, suggesting investors may return to strategies that rely on low stock volatility despite a near collapse in stocks early this month.
The Cboe Volatility Index (^VIX) fell to 16.31 on Wednesday, its lowest level since the start of the month. The index reached 65 on August 5 and closed that day at a four-year high of 38.57, as investors roiled markets by unwinding several huge positions such as the yen-funded carry trade.
If the index’s level holds until the end, the seven trading sessions it took to return the VIX to its long-term median of 17.6 will be the index’s fastest-ever decline from 35, a level that comes with a high level of anxiety. According to a Reuters analysis, it took an average of 170 sessions to play out similar reversals in the so-called fear meter.
Some options experts believe the rapid decline in the so-called fear gauge signals that investors have returned to strategies that rely on markets remaining calm to generate profits. One of these is spread trading, where investors try to profit from the difference between index-level volatility and the volatility of individual stock options, analysts said.
“What we saw (on August 5) was a unique confluence of events,” said Steve Sosnick, chief investment strategist at Interactive Brokers. “I also find it quite remarkable how quickly everyone returned to the same playbook that worked for them after it was determined that these events appear to be temporary.”
The S&P 500 is up 5% from its Aug. 5 closing level, while the tech-heavy Nasdaq Composite is up 6% from that day’s close. Both indices are up about 14% this year.
The sharp decline in the VIX also supports the idea that last week’s record jump was fueled by technical factors and not longer-term fears about global growth, analysts said.
The VIX, which is calculated in real time from S&P 500 option prices, may have risen excessively due to lower liquidity in the pre-market hours on August 5, according to market participants. The sudden break from months of stock market calm may also have jolted some investors, who had piled into several options-based bets on continued market calm, rushing to exit those positions, fueling the rise in the VIX strengthened even further.
“It was much more about market structure issues… it was about short volatility traders being forced to close out when things went against them, and it wasn’t really about a real fundamental shock,” said Michael Purves, head of the department. Tallbacken Capital Advisors.
“If we had a fundamentally driven VIX spike because there was something really bad going on in the economy or the world, then you wouldn’t see this kind of decline in the VIX from that high level,” Purves said.
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and David Gregorio)
