The VIX index has hit its lowest point since before the pandemic, just as equity markets are trying to regain their 2023 highs. Is this telling us that when it’s bad for the VIX it’s good for stocks?

Analysts have written volumes on how to interpret the VIX, or the CBOE’s Volatility Index, and sometimes called the Wall Street “fear gauge.” Generally, it is seen as a measure of market volatility. The higher it moves, the higher the level of uncertainty in the equity markets, whereas equities tend to thrive when it is at its lowest points.

On Monday, the VIX moved a little higher — up 2.5% at 12.77 — but this remained well below its long-term average around 20. At its high in 2023 it peaked at 30, during the early days of the pandemic it spiked to 85.

Among the riskier stocks to have performed well during the rally of the past month, Carnival (NYSE:CCL) whose debt pile has made it sensitive to higher rates, has gained 30.6% in the last four weeks.

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What’s Driving VIX To Current Lows?

In recent weeks, the VIX has played along nicely with U.S. equity markets – making an inverse pattern going lower as equities have moved higher. This trend is largely attributed to a more benign interest rate outlook and slowing rates of inflation.

“Bullish price action is being seen as markets warm to the tail-end of the rate hiking cycle,” said Barnaby Martin, strategist at Bank of America.

“But it’s never that simple. Bubbly markets mean tricky feedback loops for central banks as financial conditions ease,” he added.

What Exactly Is The VIX Index?

During times of market upheaval — economic slumps, geopolitical turmoil, global pandemics etc. — equities tend to move sharply lower. The more volatile the market conditions, the higher the VIX moves. Levels above 30 are generally seen as “fear” indicators.

The VIX is an index calculated from the price of call and put options on S&P futures traded on the Chicago Board Options Exchange. Because the prices are based on futures, the VIX is often seen as a forward-looking indicator, so when it shoots higher, it might be a time to abandon some of those riskier assets.

However, the broader equity market typically doesn’t diverge from the VIX’s trends for an extended period, making prolonged trades risky. A rising VIX indicates increasing market volatility and potential uncertainty, which can be hazardous, especially for those engaged in short selling strategies. On the other hand, a consistently low VIX may lead to complacency, increasing the risk of missing critical sell signals in the market.

Thus, at current levels, investors could be mispricing the risk of economic slowdown in the fourth quarter and first half of 2024.

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