The recent spike in the Chicago Board Options Exchange (CBOE)’s Volatility Index (VIX) to above the 30 level shows how scared investors are of the impact of COVID-19 and the power of the US Federal Reserve’s words. The VIX, which is Wall Street’s fear gauge, has been hovering between the 15 to 20 level range for most of 2021. However, it has recently surged to the 30 level before dropping back to 19.9 on the previous day’s closing (9 December 2021). In comparison, the VIX average was around the 19.2 level for the last decade.
However, the increase in the VIX to the 30 level following the discovery of the new COVID-19 variant, Omicron, was not as steep as when the COVID-19 outbreak happened back in early 2020. In March 2020, the VIX surged to the 83 level as fear took over the market due to the uncertainties over the pandemic at that time.
In fact, the VIX only breached the 30 level temporarily before declining this week. The recovery in the S&P 500 Index and decline in the VIX points to waning fear over the new Omicron variant despite the lack of clarity on the impact of the new variant. This is partly due to the data provided from South Africa that revealed the new Omicron variant may be more contagious but less severe than previous variants. Hospitals in South Africa have not seen an increase in the number of patients that require breathing treatments as compared to previous infections, but more data is required over the next two weeks for more clarity on this front.
Aside from that, the VIX’s moderation to a lower level and the stability seen in the stock market are indications that traders are reducing their hedge bets against the markets. Do bear in mind that the VIX is also a measurement of implied volatility for the S&P 500 options contract.
The swift rebound in the S&P 500 Index and the decline in the VIX reflects the fear-of-missing-out (“FOMO”) mentality as investors were quickly reminded of how the market rebounded sharply during the COVID-19 pandemic.
A Lower VIX could set up for a Santa Claus rally by end of this year
From a technical perspective, if the VIX were to fall below the 20 level, it could point to a sign that a Santa Claus rally in the US stock market might happen towards the end of the year.
However, investors and traders should keep in mind that the US Federal Reserves is meeting again next week to discuss the pace of taper, which could also increase uncertainty. Any increase in the hospitalisation rate in South Africa and other countries linked to the spread of Omicron could also quickly reverse the tide.
Having said this, as it is now, the Wall Street’s fear gauge is telling us that Santa Claus is coming to town.
Source: Bloomberg, ProsperUs