- Widely used as a fear vs. greed gauge, the VIX has now swung so far in the negative that there are some on Wall Street who think that a sharp rally in stocks may be in the offing.
- Meanwhile, the VIX has been at over 30 for the past week – with traders typically noting that readings over 30 are a sign of significant fear in the market.
If the day is darkest before the dawn, then markets are starting to look at that point, at least according to the Cboe Volatility Index futures spread, otherwise know as the VIX.
Widely used as fear vs. greed gauge, the VIX has now swung so far in the negative that there are some on Wall Street who think that a sharp rally in stocks may be in the offing.
Ahead of the U.S. Federal Reserve’s policy meeting today, the U.S. put (bearish option to sell at a certain price) to call (bullish option to buy at a certain price) ratio’s absolute level is near the highest since January, after investors beefed up hedges into the falling market amid growing concerns of a recession and aggressive policy tightening.
Outside of an unexpectedly sharp interest rate hike by the Fed, the unwinding of these hedges should provide some support to U.S. equities as investors square off positions after the Fed’s interest rate decision today.
Meanwhile, the VIX has been at over 30 for the past week – with traders typically noting that readings over 30 are a sign of significant fear in the market.
Significantly, the spread between 2-month and 8-month VIX futures contracts are trading near peak levels seen earlier this year, reflecting the deep uncertainty regarding the near term.
Such indicators of short-term stress have historically been turning points for risk assets, with volatility peaking in the days leading up the Fed’s prior three meetings this year.
Plucky investors could be positioning themselves for a rally, because if the Fed acts as more or less expected, that uncertainty will be resolved and markets could rally in response.
Given the slew of uncertainty in the markets at the moment, taking at least one variable out of the equation – monetary policy – would be sufficient to help investors heave a sigh of relief and perhaps whet some appetite for risk.
