With a big week of numbers lining up, it is a good time to look at the indicators that can tell you what to expect moving forward. As the market looks for inflation data and another potential hike from the Feds, short term memory may prevent traders from seeing what is on the horizon.
A great place to start is the VIX. This is an indicator that measures how much volatility traders are expecting in the market in the coming months. It is often mistaken as an indicator that measures the actual volatility of the markets but that is not the case. It is actually a representation of the prices of put and call options on the S&P 500 over the next 30 days. Now it is at a low we haven’t seen since before the pandemic started.
When you look at the spike in the VIX at the pandemic, that gives you an idea of how it works. The market dropped for a matter of weeks before rebounding into a historical rally. But you can see on the chart above, that drop not only sent the VIX to record highs, it also moved it into a range that was 2-3 times the range it had been in. There is a correlation between the VIX and the broader market in that the VIX will typically go up when the market goes down.
So what do these new lows tell us about what we can expect.? Take a look at the S&P and pay attention to the period leading up to the pandemic.
With the exception of a couple pullbacks, we experienced a slow, steady climb. With Interest high and going higher, it is tough to get money for rapid growth. This means companies are forced to look to more organic ways to build their businesses. Inflation means consumers are being forced to be more conservative in their spending. It sounds over simplified, but it is what we have seen in the past. The low VIX is a sign that we are in for a grind.
If you are looking for the silver lining, the return in fixed income investments are benefiting greatly from the rising rates and offering effective ways to buoy a trading portfolio as we scan through for the big moves. Also, a lower VIX creates cheaper options making now the time to look to the powerful leverage they provide as a way to keep a trading account growing.
Keep learning and trade wisely,
Market Wealth Daily