VIX Under 25 Is Positive for the Stock Market – But There’s a Catch

July 21, 2020 2:29 PM UTC
From the perspective of volatility, the U.S. stock market is entering a much calmer period. How long will it last?
  • The CBOE Volatility Index fell below 25.00 on Monday.
  • VIX trades on a scale of 1-100, where 20.00 represents the historic average.
  • As the VIX reverts to the mean, fund managers are betting on a quieter period for stocks.

Implied volatility in the U.S. stock market has declined substantially over the past month, offering some reassurance that the worst of the pandemic-induced turbulence has passed.

Volatility Is Declining

On Monday, the Chicago Board Options Exchange Volatility Index, commonly known as the VIX, closed below 25.00 for the first time since early June. The so-called “fear index” opened lower on Tuesday and is now on pace to set new pandemic lows.

The VIX touched an intraday low of 23.61 on Tuesday, where it was on track for its lowest settlement since February. | Chart: Yahoo Finance

The so-called “fear index” has come a long way down from its March high of around 83.00. The March peak coincided with a historic plunge in stocks, as the major indexes briefly entered bear-market territory. (The VIX and S&P 500 trade inversely with one another about three-quarters of the time.)

The VIX surged in March, reaching its highest level since the financial crisis. | Chart: Yahoo Finance

According to CNBC’s Michael Santoli, “VIX under 25 shows tension release” in the stock market.

He adds:

Big funds starting to sell volatility again to capture rich premiums and bet on a doldrums period for stocks.

Summertime is usually a much quieter period for stocks, but that hasn’t been the case this year. The fallout from the Covid-19 pandemic has gripped investors for most of 2020. With the VIX in sharp retreat, expected volatility could finally be waning.

Tech Stocks Do Most of the Heavy Lifting

Wall Street’s miraculous recovery in recent months hasn’t been as swift as the major benchmarks indicate. A large portion of those rallies has been driven by technology shares, which are vastly outperforming the market.

The S&P 500 Index recently turned positive for 2020, but roughly 320 members are still in the red. Astonishingly, Amazon (NASDAQ:AMZN) accounts for 263% of the benchmark’s return since the year began. Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) have each contributed more than 195%.

Big-tech continues to drive Wall Street’s epic recovery. | Image: Twitter

Even on a 12-month performance basis, technology is king:

The S&P 500’s information technology index has returned nearly 31% over the past 12 months. | Image: Fidelity

One of the reasons why tech shares are outperforming is their relative advantage during the pandemic. The sector has also seen a momentum surge, as evidenced by the Nasdaq premium relative to its 100-day moving average.

Momentum in technology stocks has reached its highest level in 20 years. | Source: Twitter

Not everyone is convinced the tech-induced rally can last. Record central-bank liquidity, the surge in retail trading, and dangerous parallels with past bubbles suggest technology stocks are significantly overvalued. If markets realign to the fundamental picture of the economy, the sector and broader market could be due for a pullback.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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