IWC

Volatility Alert: Brace for a Big Spike in the CBOE Volatility Index (VIX)

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We are in a high-risk period. The ratio of lumber prices to gold prices has utterly collapsed as gold continues to hit record highs. Utility stocks are also showing strength relative to the S&P 500, something you typically see in advance of high-volatility junctures for equities. Treasurys are still quite volatile, but they are outperforming on specific days when stocks are down.

In other words, the flight-to-safety trade looks like it’s trying to assert itself against inflationary headwinds. We are in a stock market storm that is only getting stronger.

When we look at the iShares Microcap ETF (NYSEARCA:IWC) as a proxy, it appears to face rejection at resistance. There is no bull market on this chart. If investors were confident, they would likely bid up illiquid, speculative parts of the investable landscape. Right now, that is not happening.

Micro-cap stocks look like death.

New bull market bro. pic.twitter.com/R0rilvM8sO

— Michael A. Gayed, CFA (@leadlagreport) April 12, 2024

What Is Causing the Stock Market Storm?

One of the largest catalysts for volatility right now is concern that Iran will strike Israel. Another is uncertainty over how Japan will respond to a weakening yen.

The potential for an oil spike is very real, and very underappreciated. A spike in the CBOE Volatility Index (VIX) is also likely.

The VIX is a real-time index representing the market’s expectations for volatility over the coming 30 days. Calculated from the prices of S&P 500 index options, it provides a measure of market risk and investor sentiment.

Essentially, a higher VIX indicates higher expected volatility, suggesting increased uncertainty. A lower VIX points to a more stable market expectation. Investors widely use this index to gauge the market’s anxiety levels.

Anxiety levels SHOULD be rising. Sentiment data shows very few investors are bearish here, and I don’t see anything suggesting there’s tail risk hedging going on more broadly. When you combine this with the fact that April marks the end of the “6 best months” of the stock market leading to “sell in May, go away,” all the stars are aligning for meaningful volatility ahead.

The Bottom Line

So, what do you do if we do have a major VIX spike? I always go back to the point that historically the best risk-off plays are the dollar, utility stocks, gold, and Treasurys. The dollar and gold have already had big moves. Utilities are still equities. Maybe, just maybe, long-duration Treasurys will finally work in a big way for a moment in time. Their reaction on big down days confirms that. Now let’s see if credit spreads confirm next.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing. Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers. InvestorPlace readers that are new subscribers to the The Lead-Lag Report can receive a 30% discount.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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