(Bloomberg) -- One marker of stock-market volatility is at a level that in the past has signaled the S&P 500 Index was close to a near-term bottom.
As equities slump globally, volatility is rising with investors snapping up options to protect from a further selloff after surprisingly weak jobs growth on Friday added to concern that the Federal Reserve is waiting too long to reduce interest rates. So much so that futures on the Cboe Volatility Index have inverted, a signal that the here-and-now uncertainty is higher than that further down the line.
August VIX contracts are trading at 24.4, compared with 23.8 for the September futures. The past four times the front-month contract closed higher than the second-month — in June and October 2022, last October and this April — the S&P 500 neared a low.
“The fact that we had such a huge spike in volatility on Friday is emblematic of the end of a short-term negative move in the stock market,” said Steve Sosnick, chief strategist at Interactive Brokers LLC. “It doesn’t necessarily tell you about the long-term cycle.”
Stocks in Asia plunged with Japan’s Topix index losing as much as 7.8% on Monday, following a global rout last week. On Friday, the VIX index rose to as high as 29.66 before settling at 23.39, or 5 points above its Thursday close. Relative to its historical and linear relationship to the S&P 500, the volatility gauge should have increased by only 2 points, and the 3 point “excess” gain is in the 99th percentile of historical observations going back to 1990, Citigroup Inc. strategists including Vishal Vivek noted.
Traders bid up options on the S&P 500 — and those on the VIX too. A gauge of volatility of volatility, the VVIX index, spiked to its highest level since March 2022, posting its biggest weekly increase since 2017 in another sign of the sudden demand to hedge the big swings in a market that had remained relatively calm. The VVIX is now at the higher end of its historical range from the past five years, while the VIX is on well-trod ground.
“If volatility of VIX stays elevated it can suggest expectations for a more volatile period,” Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist, wrote in a note.
The broadening selloff has put the brakes on a shift in sentiment to favoring small-cap stocks. The one-month put skew on the SPDR S&P 500 ETF Trust is the highest since June 2023, while on the Invesco QQQ Trust Series 1 tracking the Nasdaq 100 Index it’s the widest since October. And even the put premium on the iShares Russell 2000 ETF, which had diverged from its bigger-name cousins, snapped back from its midweek low.
Realized volatility is also climbing sharply as market swings — both up and down — have broadened, more than doubling since early July to the highest level since November. That may limit how much some funds that look to limit volatility can invest. At the same time, stock correlation has increased from historically low levels in late June, when investors chased the rally in artificial intelligence and technology megacaps.
“The increase in equity realized volatility from low levels is problematic for systematic strategies that use it as an input to automatically size exposure,” Sandhu said. “If elevated realized volatility persists, it will limit how much leverage these funds use in a rally.”
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