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Analysis: Wall Street ‘fear gauge’ offers no silver lining as bear market looms

Friday, May 13, 2022
Analysis: Wall Street ‘fear gauge’ offers no silver lining as bear market looms © Reuters. Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S. May 4, 2022. REUTERS/Brendan McDermid/Files

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - A surprising lack of panic in the U.S. stock market as measured by Wall Street’s "fear gauge" is keeping some investors from calling a bottom on an already bruising equity selloff.

Since 1990, the Cboe Volatility Index has hit an average level of 37 at market bottoms, compared with its most recent level of around 32.

Some investors believe that means stocks are yet to see the crescendo of fearful selling that has sometimes accompanied past market bottoms, even though the S&P 500 has already fallen nearly 20% from its record high, a level that would confirm a bear market.

"Sentiment is negative out there but there is no real fear, there is no sense of panic," said Kris Sidial, a co-founder at volatility arbitrage fund The Ambrus Group. "The one thing that you are not seeing is capitulation."

The VIX – which measures the expectation of stock-market volatility as expressed by options prices – stands far above its long-term median level of 17.6.

Many investors believe volatility is likely to remain elevated as markets digest a hawkish Federal Reserve, soaring inflation and geopolitical uncertainty stemming from the war in Ukraine.

While it’s not necessary for the VIX to shoot higher before calm returns to markets, the index's failure to climb well above the mid-30s may be a sign that selling in stocks is not yet washed out, making it more dangerous for those looking to buy on weakness, market participants said.

"I just don't think we have seen that sort of event that marks a bottom," said Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:IBKR).

The VIX had logged a high close of 82.69 during the March 2020 COVID-19 driven selloff, after which the S&P 500 more than doubled as the Fed slashed rates and implemented other easy money policies to support the economy. The index hit 36.07 in 2018, when stocks stopped a hair short of entering a bear market on worries over tighter Fed policy, and topped out at 80.86 during the Great Recession.

"I would love to see more panic and absolute flushing of this market," said Mike Vogelzang, chief investment officer at CAPTRUST. "I'd love to see VIX at 40 or 45."

One reason why the VIX - which is calculated based on S&P 500 options contracts - may be relatively subdued is that the gradual grinding selloff has left investors lighter on their allocation to equities.

Investors' aggregate equity positioning has slipped to the levels lowest since the 2020 COVID-19 selloff, analysts at Deutsche Bank (ETR:DBKGn) estimate.

Meanwhile, options positioning in S&P 500 and the VIX show a market that is very well hedged against declines, said Brent Kochuba, founder of analytic service SpotGamma. With defensive positions in place, investors see little hurry to buy more put options even as the market grinds lower, Kochuba said.

The VIX is far from the only sign investors look at when trying to determine whether markets have bottomed, and at least one volatility measure – one month historical volatility – shows markets may be closer to a turning point than indicated by the VIX.

That measure of choppiness stands at 29, its highest since July 2020 and about 4 points above where it stood on the day the S&P 500 bottomed during the last 54 instances of corrections and bear markets going back to 1928, a Reuters analysis showed.

Still, some believe that any recovery in stocks is unlikely to last without a big "crash-up" in volatility.

"What you have now is people hanging on and hoping for a bounce," said Patrick Kaser, portfolio manager at Brandywine Global Investment Management.

To mark the end of the selling, however, the market needs a "a moment of high profile failure and pain," Kaser said.

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22-05-2022 12:22:59 (UTC+7)

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Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (7)

Sell (0)

EUR/USD

1.0562

-0.0024 (-0.23%)

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↑ Buy

Moving Avg:

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Indicators:

Buy (7)

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GBP/USD

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USD/JPY

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USD/CAD

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US Coffee C Futures

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US Small Cap 2000

1,773.27

-2.96 (-0.17%)

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↑ Buy

Moving Avg:

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Sell (5)

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IBEX 35

8,484.50

+78.50 (+0.93%)

Summary

Neutral

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BASF SE NA O.N.

48.850

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Bayer AG NA

63.74

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195.58

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Adidas AG

172.80

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Sell (1)

Deutsche Lufthansa AG

6.852

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Summary

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 EUR/USD1.0562↑ Buy
 GBP/USD1.2489Neutral
 USD/JPY127.86Neutral
 AUD/USD0.7039Sell
 USD/CAD1.2839↑ Buy
 EUR/JPY135.05Neutral
 EUR/CHF1.0296↑ Buy
 Gold1,845.10↑ Buy
 Silver21.765↑ Sell
 Copper4.3042↑ Buy
 Crude Oil WTI110.35↑ Sell
 Brent Oil112.91↑ Sell
 Natural Gas8.058↑ Sell
 US Coffee C216.48↑ Buy
 Euro Stoxx 503,657.03↑ Buy
 S&P 5003,901.36↑ Buy
 DAX13,981.91Buy
 FTSE 1007,389.98Neutral
 Hang Seng20,717.24↑ Sell
 Small Cap 20001,773.27↑ Buy
 IBEX 358,484.50Neutral
 BASF48.850Buy
 Bayer63.74Buy
 Allianz195.58Buy
 Adidas172.80Buy
 Lufthansa6.852↑ Sell
 Siemens AG115.08Neutral
 Deutsche Bank AG9.362Buy
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