Did 2022 break Wall Street’s ‘fear gauge’? Why the VIX no longer reflects the sorry state of the stock market – MarketWatch
U.S. stocks are about to cap off their worst year since 2008. But investors wouldn’t know it by glancing at what’s often referred to as Wall Street’s favorite fear gauge, which has recently failed to reach new heights as stocks tumbled to fresh lows.
The Cboe Volatility Index
VIX,
-3.34%,
better known as the VIX, is on track to finish 2022 not far off its long-term average despite widespread pain across markets. The VIX, based on trading in S&P 500 index options, serves as an indicator of expected volatility in the index over the coming 30-day period.
After topping out at 36.45 on March 7, it repeatedly failed to make new highs for the year, according to data from FactSet, even as stocks tumbled to their lowest levels in years in June and again in September and October.
Nicholas Colas, co-founder of DataTrek Research, highlighted the phenomenon in several research notes to his clients this year.
Not only is the S&P 500 on track to finish the year down roughly 20%, 2022 has also been the most consistently choppy year for stocks in more than a decade by at least one measure.
The index has recorded 46 moves of 2% in either direction since the start of the year, the most since 2009, according to Dow Jones Market Data — narrowly surpassing the number from 2020. That’s roughly four times the 10-year average of 11.3 per year.
The VIX fell 3% on Thursday to 21.46 in afternoon trading as the S&P 500
SPX,
+1.74%,
Dow Jones Industrial Average DJIA and Nasdaq Composite COMP all headed for daily gains after the Nasdaq booked its lowest closing level of the year on Wednesday.
A ‘really terrible year’
Perhaps counterintuitively, Colas and others see the subdued VIX as a potential cause for concern. This is because a spike in the fear gauge has typically preceded stock-market bottoms in recent decades.
Colas and others refer to the phenomenon as “capitulation,” meaning that a surge in the VIX means that sentiment in the market has grown so dire that the beginning of a market turnaround is likely at hand.
The VIX surged above 80 before stocks bottomed out in March 2009, and again in March 2020. Colas has said in the past that levels above 40 are needed to signal that capitulation is at hand. Volatility typically rises fastest when stocks are falling, market strategists said.
The lack of a clear signal that bears are reaching a point of exhaustion has made some …….