Thursday’s selloff in stocks sent the smell of fear trickling across the markets.
The CBOE Volatility Index, also known as the VIX or ‘fear index,’ jumped to its highest level since April, and had its best two-day stretch since the start of the year. In fact, while the stock market closed the month in the red, the VIX was up more than 45 percent—its biggest monthly increase since July 2011.
The VIX, however, is still at fairly low levels compared with recent years—the index is currently trading just under 17 as opposed to 40 back in 2011—and historically, a sharp surge in the index is often followed by an equally sharp selloff.
So, should investors brace themselves for more volatility? Or could this just be a one-time event?
“First off I want to make sure everybody is very clear, the VIX is a measure of volatility, not a measure of market direction,” said David Seaburg of Cowen and Co., who believes volatility will continue to grind higher.
“When you look back to when the VIX was really at its lows around 10.5 or 11, we were during a period of real concern, people were complacent, they were sitting on their hands, investors weren’t trading because they were worried about the economy they were worried about the direction of jobs and what have you. So they kind of sat back and let things ride because complacency made people a lot of money last year.”
Seaburg noted that better-than-expected second-quarter GDP is proof that the economy is steadily improving. “We’re in a period of change,” he said. “So it’s forcing investors to think a little bit and when you’re forced to think obviously there is going to be a lot of change and I think that ultimately volatility is going to pick up.”
Auerbach Grayson’s Richard Ross, who has been bearish on the overall market for some time, said the charts are screaming for more volatility. “Stocks are in grave danger here and I’m looking for volatility to surge higher, not grind higher.”
Ross pointed out that on a 12-month chart a rounded base of support and broken trend sets the stage for a sharp move higher to the 21 level, but stressed that the long-term weekly chart is what should have equity investors concerned.
“I want you to focus on that 200-week moving average which comes in around 17.75. We haven’t had a weekly close above the 200-week in over 2½ years. The last two times we did close above that level, back in 2010 it corresponded with a 17 percent decline in the S&P 500, 2011 a 21 percent decline in the S&P 500. That could take the S&P down to 1,560,” he said, which is around a 20 percent decline. “With a break above that 17.75 level you want to watch out for stocks.”