Market watchers say the VIX volatility gauge is still not giving a bottom signal for the stock market

Stock market investors have been on a rollercoaster ride, but a closely watched measure of expected volatility has yet to convincingly signal that the sell-off will bottom, analysts said on Monday.

The Cboe volatility index VIX,
an options-based measure of the expected S&P 500 SPX,
Next-30-day volatility rose 11.8% to 33.76 early Monday, above its long-term mean of 20 but below levels typically associated with a market bottom, Nicholas Colas, co-founder of DataTrek Research, said in a note.

The VIX’s close on Friday at 30.2 left it in a “no man’s land” between 28 and 36, marking 1 and 2 standard deviations from the long-term mean, he wrote. The VIX hit 35 in early action as stocks swooned early Friday, likely attracting algorithmic traders and allowing the market to bounce back slightly later in the day.

“The bottom line here is that the VIX level of 36 continues to ‘work’ as a sign of an intraday low, but we’d like to see it close at 36 or higher as evidence of a major washout in US equities,” Colas said . “This should have happened on Friday when the 10-year Treasury yield rose to 3.14% and WTI crude rose to $110/barrel. But it didn’t, and so we continue to wait for an investable bottom.”

In a chart: Sell-out on the stock exchange in the liquidation phase. Why it has to get “hot” before it burns out.

Stocks saw wild swings last week, edging higher on Wednesday after the Federal Reserve delivered a widely-anticipated 50 basis point rate hike only to give it all back and then some on Thursday as the Dow fell more than 1,000 points. Major indexes posted weekly declines on Friday, with the S&P 500 closing at its lowest level since May 19, 2021, while the Dow Jones Industrial Average DJIA,
posted its lowest close since March and the Nasdaq Composite COMP,
recorded its lowest level since November 25, 2020.

The VIX is yet to reach its April high above 36, let alone the March high above 37. Analysts have argued investors fear an even deeper sell-off in the coming months as the Fed prepares to continue aggressive tightening, to curb inflation.

VIX futures also offer little comfort to those looking for a sign the bottoms are near, Jonathan Krinsky, technical analyst at BTIG, said in a Sunday note. While the near May futures contract VXK22,
is trading at a premium of about 0.5 points to the June contract VXM22,
the gap must increase to send a convincing ground signal, he wrote (see chart below).

BTIG Market watchers say the VIX volatility gauge is still not giving a bottom signal for the stock market

Brian Lowry

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