Low Volatility Bodes Well for Stocks

www.investing.com/analysis/low-volatility-bodes-well-for-stocks-200648782

By FxPro Financial Services Ltd (Alexander Kuptsikevich) | May 28, 2024 08:30AM ET

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The Nasdaq 100 and S&P 500 indices are showing measured gains, while volatility has declined to levels last seen in January 2020. Many traders are looking at this volatility compression as the calm before the storm, something we saw just over four years ago. The prudent strategy for this market is to "buy the dip." A sustained rise in the VIX above 20 would signal the start of a correction.

VIX Index-Monthly Chart

However, history suggests that a VIX decline alone is not enough to predict a market reversal. From May 2018 to January 2020, the index dipped below 12 several times. During that time, the S&P 500 index added over 30%, and a "buy on downturns" strategy would have provided even more attractive returns.

Moreover, the VIX spent almost all of 2017 below 12, during which time the S&P500 added 20%, against a long-term average of 10-11%. In this episode, the market didn't encounter a powerful correction until early 2018, and the index returned to growth from higher levels than before the lull.

The same can be said for earlier periods: a VIX pullback into the 10-12 area is often followed by a transition to accelerated market growth, often with shallow corrections.

S&P 500 Index-Monthly Chart

The distinction between short-term pullbacks and the start of a deeper correction can be made roughly through the 20 level of the VIX. Continued declines in equities and further increases in volatility mean the market switches into "fear" mode. In this case, but not before, it is worth changing tactics from "buying on downturns" to selling on growth.

In October 2023 and April 2024, the VIX temporarily rose above 20 but quickly pulled back, giving false early signals.

If the VIX continues to decline further, we will only get an "irrational optimism" signal when it drops below 9, but even then, it could be months before the S&P 500 and Nasdaq 100 reverse.

The FxPro Analyst Team

Disclaimer: This material is considered to be marketing communication only and does not contain, and should not be construed as containing, investment advice and/or an investment recommendation and/or, an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the Client following an assessment by him/herself of their situation. Prices, quotes and all the related data may change without further notice.\\r\\n\\r\\nTrade Responsibly. 78.87% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

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US 30	43,554.0	+119.7	+0.28%
US 500	5,990.7	+34.5	+0.58%
Dow Jones	43,433.12	-188.04	-0.43%
S&P 500	5,956.06	+0.81	+0.01%
Nasdaq	19,075.26	+48.88	+0.26%
S&P 500 VIX	18.06	-1.04	-5.45%
Dollar Index	106.550	+0.221	+0.21%

Crude Oil WTI	69.01	+0.39	+0.57%
Brent Oil	72.47	+0.40	+0.56%
Natural Gas	3.982	+0.023	+0.58%
Gold	2,900.66	-29.94	-1.02%
Silver	32.075	-0.197	-0.61%
Copper	4.6110	+0.0245	+0.53%
US Soybeans	1,030.25	+5.25	+0.51%

U.S. 10Y	4.304	+0.055	+1.29%
U.S. 30Y	4.552	+0.045	+1.00%
U.S. 5Y	4.129	+0.052	+1.28%
U.S. 3M	4.317	+0.015	+0.35%
US 10Y T-Note	110.50	-0.34	-0.31%
Euro Bund	132.69	-0.25	-0.18%
10-2 Yield Spread	17.88	-1.73	-8.82%

Apple	240.36	-6.68	-2.70%
Alphabet A	172.73	-2.69	-1.53%
Tesla	290.80	-12.00	-3.96%
Amazon.com	214.35	+1.55	+0.73%
Netflix	990.06	+12.82	+1.31%
Meta Platforms	673.70	+16.20	+2.46%
Bank of America	43.94	0.00	0.00%

Low Volatility Bodes Well for Stocks

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