The stock market looks downright fearless.
The CBOE Volatility Index — or VIX — dropped to 8.84 on Wednesday, its lowest intraday level in history. Used to gauge concern in the S&P 500, it’s hovered near record lows for weeks now, even closing at a 24-year low last week.
Now it’s official: by one measure at least, the market is as care-free as ever.
The VIX would eventually erase that intraday loss to finish the day up 1.8%, at 9.6.
While alarmists may view a low VIX as a negative — a signal that complacency has made traders vulnerable to an unforeseen shock — many investors simply see it as a byproduct of conditions ideal for stocks to continue edging higher.
One popular rationale for the so-called melt up in stocks is that middling economic growth has kept the Federal Reserve from quickly tightening monetary policy. As a result, investors haven’t fled the stock market in favour of fixed income, and gains haven’t gotten so overheated that a corrective phase has been necessary.
In addition, the US market is in the middle of an expansionary period for corporate profits. The biggest driver of share gains, earnings growth for the S&P 500, is expected to be 7.3% in the second quarter, which would mark its fourth straight period of expansion, according to data compiled by Bloomberg.
That the VIX hit its 24-year low on the same day when the S&P 500 closed at an all-time high isn’t all that surprising, considering the two gauges trade inversely to each other roughly 80% of the time. What’s interesting about it is the lack of worry.
But not everyone thinks volatility will remain locked in its lowest-ever regime.
Last Friday, a mystery trader made a massive bet that the VIX will surge. If successful, it would yield a $US262 million payout, according to a person familiar with the trade. The investor implemented a bullish call spread strategy using hundreds of thousands of VIX options.
And then there’s the recently-unmasked volatility vigilante, 50 Cent. He’s been spending hundreds of millions of dollars to buy exposure on a VIX spike, but doing so in bite-sized pieces.
Whether these two gentlemen wind up having their day in the sun remains to be seen. In the meantime, those shorting volatility are popping champagne bottles.
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