- A decline in stock-market volatility over the past few weeks suggests more upside ahead for stocks.
- On Tuesday, the CBOE Volatility Index fell below the key 20 level and hit its lowest levels because the start of the COVID-19 pandemic.
- According to Fairlead Strategies’ Katie Stockton, a constant VIX reading below 20 would signal a bullish shift in sentiment.
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The stock market’s fear gauge fell below a key level on Tuesday that suggested further upside was ahead for stocks.
The CBOE Volatility Index, also identified as the VIX, fell below the 20 level and hit its lowest level because the start of the COVID-19 pandemic. A VIX below 20 is viewed as a signal that the stock market is transitioning from a excessive-volatility regime to a low-volatility regime, according to Fairlead Strategies’ Katie Stockton.
And according to Fundstrat’s Tom Lee, a fall below 20 in the VIX signals a risk-on setting that would spark fund flows into stocks from systematic and quantitative funding funds.
“A fall below 20 takes this volatility index to pre-2020 levels and a fall in the VIX would be a risk-on signal,” Lee said in a gift last month.
But the VIX has staged multiple head fakes over the past few months, swiftly falling below 20 before spiking larger in February, November, and August.
That’s why Stockton recommends investors wait for confirmation of a breakdown in the VIX before making any portfolio changes, adore placing off market hedges. Confirmation of a VIX breakdown would require consecutive daily closes below the 20 level, according to a Tuesday gift from Stockton.
“This is able to mark a potentially bullish shift in sentiment, and a coast from a excessive-volatility regime to a low-volatility regime, last viewed pre-Covid with a unusual floor for the VIX near 11,” Stockton said, adding that a VIX breakdown “would give a enhance to near-time interval upside note-via for the inversely correlated S&P 500.”