By William Watts
VIX near current levels has signaled tops in the past 4 bear market rallies: DataTrek’s Colas
A popular gauge of expected volatility may be signaling that the stock market’s bounce off the October lows is running out of room, according to a closely followed Wall Street analyst.
A narrow trading band for stocks over the past six trading sessions saw the Cboe Volatility Index , an options-derived measure of expected volatility in the S&P 500 over the next 30 days, pull back from around 26 on Nov. 19 to end near 23 on Friday, noted Nicholas Colas, co-founder of DataTrek Research, in a Monday note.
Colas said the chart below, tracking year-to-date activity, “shows why we get worried about U.S. equities once the VIX breaks 24 to the downside and starts to edge its way down to 20.” The red line tracks the S&P 500 , and the black dotted line is a reading of the VIX that’s been inverted to make its correlation with the S&P 500 easier to visualize.
“The 2 horizontal lines highlighting the 20 and 24 VIX readings have been the warning track for each of this year’s 4 bear market rallies. Once the dotted VIX line crosses into this area, the solid red S&P line starts topping out and soon declines,” Colas wrote.
Stock-index futures pointed slightly lower early Monday. Major indexes posted a weekly decline on Friday, leaving the S&P 500 up nearly 11% from a nearly 2-year low finish set on Oct. 12. It remains down 16.8% in the year to date. The Dow Jones Industrial Average is up more than 17% from its Sept. 30 closing low, trimming its year-to-date loss to less than 8%. The Nasdaq Composite is down nearly 29% for the year to date.
See:Black Friday can offer investors clues about how much gas consumers have left in the tank: Here’s what to watch out for
Colas said that the Thanksgiving holiday-shortened week could see a light volume drift higher for U.S. stocks, which would likely see the VIX continue to move lower.
“We are already at VIX levels which say, ‘Let’s be careful,’ however,” he noted.
-William Watts
(END) Dow Jones Newswires
11-21-22 0834ET
Copyright (c) 2022 Dow Jones & Company, Inc.
Read More: Is the stock-market rally running out of road? Watch this number.