I think we are LONG overdue for a CBOE Volatility Index (VIX) spike. And it may be coming sooner than investors think.
I know: Some people think I’m always bearish, but that really isn’t the case. At the core, I’m quant-oriented. I look at various intermarket relationships that historically have some degree of predictive power and couch the movement in terms of what’s going on from a macroeconomic perspective. To me, everything is about conditions that favor an accident. And in the context of markets, an accident is a sudden volatility move that catches investors by surprise.
We haven’t had one of those in some time, at least not to where the VIX sustains a spike above the 20 level. I think that could be about to change. And for a few reasons.
First off, as I’ve noted before, from a seasonality perspective, we are in the window where historically volatility for stocks tends to rise in an election year. This goes beyond the headlines with current candidates and news that President Joe Biden won’t run for reelection. This goes beyond the assassination attempt on former President Donald Trump. This just goes to historical patterns. Current dynamics obviously further add fuel to history’s fire.
Plus, gold continues to suggest that big money is positioning into non-correlated assets. This suggests institutional investors are worried that stock market risks are rising. Utility stocks are perking up again, another sign that investors are trying to counter risk. And Treasurys are stabilizing as investors start to price in a rate-cutting cycle by the Federal Reserve.
I’ve been in the business for 20 years and I have NEVER seen complacency among individual investors and financial advisors as I do now. Investors currently have way too much exposure to a select number of large-cap tech stocks. They are betting that Trump will win in November, lower taxes, and issue in a goldilocks economy. This all sounds great. However, beneath the surface something is clearly bothering the stock market and in a bad way.
Perhaps CrowdStrike’s (NASDAQ:CRWD) global IT outage is just a reminder to the world that risk happens fast, can come out of nowhere, and can shock markets while we sleep. In the same vein, I believe a VIX spike is coming. And when it does, it could be a big one that shocks the complacency out of everyone.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.