👀 A REGIME SHIFT?

15 апр. 2023 г.

As you know, I'm a big fan of the VIX (aka Equity Fear index). It shows the 30-day expected volatility of the US equity market dervied from participants in the options market. The idea is that sophisticated investors tend to use options for hedging out risks.

Below I show a long-term chart of the VIX in relation to the S&P500. Sorry for making you squint but you should get my point without all the tiny details.

In equity markets, we basically see three regimes that dominate.

➊ Low volatility (in the middle of the chart) where the VIX is relatively low e.g < 17. Although there are periods of "fear" and spikes in the VIX, none is really consequential and we have a gradual slightly bumpy increase in equity prices.

➋ Hightened volatility (e.g VIX > 17) where the VIX stays heightened due to some underlying unease with the economy. This is reflected by larger swings up and down as Investors are more swayed by sentiment shifts. Usually we see side-ways moving action.

❸ Panic and Collapse of the VIX where it spikes significantly due to wide-spread fear followed by a sharp drop in the VIX as fear subsides. We see the huge sell-off and subsequent accelerated increase in equity prices

❓The reason why I bring up this topic is that I detect a binary shift. Currently we are in state ➋, a heighteneed volatility regime. With the recent drop in the VIX are we moving to ➊? A low volatility regime and therefore a bull market? or we have yet to experience ❸, the build up to a true panic event with the recent banking crisis being a warm-up.

➼ A state of heightened period of volatility (➋) usually doesn't last long. It is the holding pattern that gives way to ➊ or ❸. This is a binary outcome and that is why market sentiment is all over the place. This unease will resolve itself soon!

⭕️ In my opinion, there's no hurry to "bet the house" on either outcome. There's plenty of money to be made once the market has decided.

🐆 MrStocky