The abnormal sense of calm signaled by Wall Street’s favorite volatility gauge could spell trouble for investors who see the market lull as an all-clear to buy stocks, according to JPMorgan Chase & Co.’s Marko Kolanovic.
(Bloomberg) — The abnormal sense of calm signaled by Wall Street’s favorite volatility gauge could spell trouble for investors who see the market lull as an all-clear to buy stocks, according to JPMorgan Chase & Co.’s Marko Kolanovic.
The bank’s top equity strategist said Monday in a note to clients that the drop in the Cboe Volatility Index, or VIX, is technical in nature, rather than an accurate reflection of the risks facing the stock market. The VIX held near 17 on Monday after falling to 16 last week, a level not seen since late 2021.
Kolanovic attributed the decline in the measure to a market currently dominated by options sellers forcing intraday reversion and leaving market prices virtually unchanged most days.
“This is unusually low given the increase of interest rates, tightening of financial conditions, level of macro risks, and elevated geopolitical tensions,” he said. “This market dynamic artificially suppresses perceptions of macro fundamental risk.”
One of Wall Street’s biggest optimists during much of last year’s market selloff, Kolanovic has since shifted his view, cutting the equity allocation in his bank’s model portfolio in mid-December, January and March due to concerns about the economic outlook.
Some investors have questioned the reliability of the VIX gauge, which barely budged last month even as turmoil in the banking sector wreaked havoc on US stocks. Analysts have attributed it to a jump in zero-days-to-expiry — or ODTE — options. The rise in short-term trading even inspired Chicago-based exchange operator Cboe Global Markets Inc. to create a one-day version of its popular measure, which launched Monday.
Kolanovic echoed doubts around the VIX as a dependable indicator for stock investors, calling it “dislocated” relative to other options markets, short-term rates and the macroeconomic backdrop.
“This is an anomaly, and the current low VIX levels are unlikely to be sustained for long,” he said.
The strategist advised investors to use any market strength spurred by upcoming earnings reports as an opportunity to reduce equity exposure.
In a separate note, Goldman Sachs Inc. strategist Christian Mueller-Glissmann said low S&P 500 volatility was due to less-restrictive monetary policy, better-than-expected growth data, as well as robust earnings results. The sharp rotation toward large-cap tech and growth stocks ahead of the earnings season has also fueled a significant drop in correlations, with the S&P 500 breadth narrowing materially, according to Goldman.
“Some of those tailwinds for lower equity volatility might fade into May,” Mueller-Glissmann wrote in a Monday note, citing likely intensifying concerns about the US debt ceiling, upcoming FOMC meeting and inflation data. May and June tend to be seasonally weaker months for equities, he added.
–With assistance from Jessica Menton.
(Adds Goldman Sachs comments from 10th paragraph)
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