U.S. stocks are about to cap off their worst year since 2008. But investors wouldn’t know it by glancing at what’s often referred to as Wall Street’s favorite fear gauge, which has recently failed to reach new heights as stocks tumbled to fresh lows.
Not only is the S&P 500 on track to finish the year down roughly 20%, 2022 has also been the most consistently choppy year for stocks in more than a decade by at least one measure. Colas and others refer to the phenomenon as “capitulation,” meaning that a surge in the VIX means that sentiment in the market has grown so dire that the beginning of a market turnaround is likely at hand.
Is the VIX ‘broken’? Comparing the VIX’s 2022 performance to 2008 recently led Michael Kramer, founder of Mott Capital, to conclude that the gauge may be “broken” in a tweet published on Wednesday. The VIX has also maintained its strong inverse correlation to the S&P 500, as Callie Cox, a U.S. equity analyst at eToro, pointed out. Data shared by Cox showed that the VIX has moved inversely with the S&P 500 SPX, +1.75% roughly 80% of the time since its inception in 1990.
Also, a generally bearish outlook for markets means that institutional investors are “fairly well hedged,” Kirsch said, which helps keep a lid on the VIX when large selloffs materialize.While the VIX is designed to interpret increased options buying as a sign that investors are growing more anxious, it specifically incorporates only options with roughly one month left until expiration.
I’m not panicking.
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