Whether the recent squeeze by individual investors in heavily-shorted U.S. small capitalization stocks is a seven-day wonder or something more permanent remains to be seen, but the market choppiness that went along with it is likely here to stay.
That’s the takeaway from an analysis by DataTrek Research, published Tuesday. The firm’s co-founder, Nicholas Colas, outlines moves in the CBOE Volatility Index VIX, -15.48%, popularly known as the “VIX,” for its ticker, and often referred to as Wall Street’s “fear gauge.”
“VIX futures actually peak in March 2021 at 31.2, which is higher than today’s levels,” Colas writes. “All VIX futures prices through September 2021 are above one standard deviation from the long run VIX mean (27.5 is that 1 sigma level).”
Colas calls himself “a bit concerned that VIX futures don’t top out until March.” That may suggest February will be another down month for stocks, he notes, since the VIX tends to move in the opposite direction from stock prices.
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It’s important to note, as Colas does, that even that peak, 31, doesn’t come anywhere close to the highs it made last year when stocks sold off sharply as the coronavirus pandemic hit the economy.
“March 16th, 2020 saw an all-time high VIX of 83, but the next 3 pops higher have all been to lower levels: 41 (June 11th, 2020), 40 (October 28th, 2020) and 37 (January 27th, 2021),” he wrote.
From an even broader perspective, however, volatility may be with us for even longer. DataTrek co-founder Jessica Rabe analyzed historical crisis periods that led to market volatility. Rabe found that higher volatility after a shock takes an average of about 2 years to settle down.
That’s because the macroeconomic environment remains uncertain and markets must re-evaluate corporate earnings. “The silver lining: volatility and equity returns are inversely correlated, so US equities should rally over time as volatility continues its downward trend from the 2020 peak,” Rabe wrote.
Comparing our current moment to the OPEC-led oil crisis of 1973 and the 2008 global financial crisis, she found that “volatility should continue to drop barring any other shocks but may not return to normal until mid-2022. Of course, this will also depend on vaccine rollouts and their ability to fight new mutations of the virus.”
Read next: ETF Wrap: Fiscal stimulus Groundhog Day, and betting on volatility
February 03, 2021 at 12:37AM
https://www.marketwatch.com/story/dont-breathe-easy-just-yet-theres-more-volatility-ahead-11612287473
Don't breathe easy just yet: there's more volatility ahead - MarketWatch
https://news.google.com/search?q=easy&hl=en-US&gl=US&ceid=US:en
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