Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Market on edge: Surging volatility
Koen Hoorelbeke
Investment and Options Strategist
Summary: In recent trading sessions and pre-market today, the VIX has surged dramatically, reflecting heightened market anxiety. With the VIX soaring and significant spikes in both the VVIX and Put/Call ratio, traders are bracing for substantial short-term market swings. Managing risk and avoiding panic selling are crucial strategies during this period of elevated volatility.
Market on edge: Surging volatility
In the last Thursday and Friday trading sessions, and pre-market today, markets have experienced a significant spike in volatility, sparking widespread concern among investors. The VIX, commonly known as the "fear gauge," has surged to levels not seen in recent times, reflecting a heightened state of market anxiety. This dramatic rise in volatility indicators, coupled with a spike in the VVIX and an elevated Put/Call ratio, underscores the current atmosphere of uncertainty. As markets grapple with these rapid changes, it is crucial for investors to understand the implications of these developments and adopt strategies to navigate this turbulent period effectively.
Also read: The perfect storm hits market and what comes next
Current Volatility Scenario:
The VIX, often referred to as the "fear gauge," has experienced a dramatic spike pre-market, soaring by 100.64% to a value of 46.93 (as of 12:12). This surge indicates heightened market anxiety and expectations of increased volatility in the near term. The VIX futures term structure is currently in backwardation, where near-term futures are priced higher than longer-term ones. This backwardation suggests that traders expect the current volatility spike to be short-lived but intense.
Below is a picture of the current VIX futures state:
The VVIX, the VIX of VIX
In addition to the VIX, the VVIX, which measures the volatility of the VIX itself, has jumped by 23.05% to 136.81 as of Friday's close. Values above 110 in the VVIX are considered significant and indicative of unusually high nervousness and volatility in the VIX itself. This elevation in VVIX highlights the significant uncertainty and the potential for sharp movements in volatility. Put/Call ratio
The Put/Call ratio, another key indicator of market sentiment, has surged to 1.96. A high Put/Call ratio implies that there are more put options being bought than call options, reflecting a bearish sentiment as traders seek protection against further declines. What This Means:
The current market conditions are indicative of significant panic and uncertainty. Elevated VIX and VVIX levels suggest that traders are bracing for considerable market swings in the short term.
The backwardation in the VIX futures term structure reinforces the expectation that this spike in VOLATILITY is a temporary reaction to current market fears. The VIX is a mean reverting index, meaning it will go lower again (ps: price action is NOT the same as volatility, so while volatility may decline, that is not a garantuee that the price will go up)
What To Do:
- Manage Risk: It's crucial to reassess your risk exposure. Ensure that your positions are not overly leveraged, as high volatility can lead to rapid and significant losses.
- De-Risk Where Needed: To avoid margin calls and potential liquidation, consider reducing positions in high-risk assets or leveraging products.
- Volatility Mean Reversion: Historically, volatility tends to revert to its mean. While the current spike is concerning, it is likely to decrease once the immediate panic subsides.
- Avoid Panic Selling: Making decisions based on fear can exacerbate losses. Instead, focus on a calculated approach to managing your portfolio.
- Short-Term Volatility: Be prepared for continued volatility in the very short term. Market conditions are likely to remain turbulent, so stay informed and ready to adjust your strategies as needed.
Conclusion:
In summary, while the current market environment is challenging, it's essential to remain calm and take a strategic approach to managing your investments. Volatility is a natural part of the market cycle, and while it can be unsettling, it also presents opportunities for those who are prepared.
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