Stocks have been higher while volatility has remained elevated, a correlation that doesn’t last for long in markets. Stock futures rose on Monday, even as the CBOE Volatility Index, known as Wall Street’s fear gauge, remained stubbornly above the 20 handle. That’s a level that reflects elevated stress in the market. Last week, the VIX topped 25 from an escalation in tensions between the U.S. and China, as well as the emergence of some credit risk. As of midday, however, the VIX finally started to fall as stocks rallied thanks to Apple . Investors also cheered the potential end to the U.S. government shutdown, as well as the release of a number of big name earnings reports this week. Typically, stocks and the VIX have an inverse relationship, with equities falling when volatility rises, and vice versa. A sustained period when they have not done so suggests the relationship will right itself in due time. “VIX can stay elevated even if SPX realized volatility does not follow suit, but we think one of them needs to eventually give,” UBS strategist Maxwell Grinacoff wrote on Friday. “Either SPX realized volatility needs to move meaningfully higher from here (as our Early Warning Signal (EWS) is suggesting), or VIX should normalize, albeit to higher lows.” .VIX 1M mountain CBOE Volatility Index, 1-mont To be sure, stocks and the VIX can rise together if investors are buying protection at the same time, either through the purchase of put options to sell underlying assets at a predetermined price, or through assets to trade volatility. Elsewhere, Morgan Stanley’s Mike Wilson noted the rise in volatility, and said it’s important to see a de-escalation in trade tensions between the U.S. and China to mitigate market risk. “We think it’s important to see follow through here from both sides, stability in EPS revisions after the recent deceleration, and more ample liquidity (reserves) before declaring the all-clear on the risk of a further near-term correction,” the chief U.S. equity strategist wrote. If Monday’s trading activity is any guide, there could be a dip once more in the VIX as stocks rally once more.
Wall Street’s fear gauge refuses to go lower even as markets stabilize. Something has to give
