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A Champion Climber


Chief Strategist at Interactive Brokers

I didn’t realize that climbing was an Olympic sport until last week.  While taking nothing away from the talented athletes who compete in it, I believe that we have been watching a truly talented climber at work for well over a year.  If markets indeed climb a wall of worry, Mr. Market is the undisputed gold medalist.

Seemingly out of the blue, there is a media fixation this morning about the relatively elevated level of the CBOE Volatility Index (VIX).  Relative to recent levels, VIX is indeed relatively elevated.  Yet relative to levels seen in the past year, VIX is below the low end of prior trading ranges.  We can see in the chart below that VIX tended to bottom out around 20, which is above the current 19.64:

1 Year Graph, VIX (bars) vs S&P 500 Index (SPX, blue line)

1 Year Graph, VIX (bars) vs S&P 500 Index (SPX, blue line)

Source: Interactive Brokers

Sure, VIX is relatively elevated when we compare it to its July lows, but well below its one-year average and nowhere close to levels seen during market hiccups.  We’ve had no real sell-offs in that period, so we only had a few days where VIX got truly elevated.  The key conundrum that I’ve been wrestling with is why VIX is consistently lower now than it was earlier this year.  We have far less consensus about the paths of monetary and fiscal stimuli, yet the relatively elevated 19 VIX is below the low end of the 20-22 trading range that persisted throughout much of the year (some of that is because call buyers have become less aggressive, which takes something out of VIX).  

Part of the media attention comes from the idea that VIX is really the market’s fear gauge.  I have disavowed this idea several times, most notably in this piece from December: “VIX is Not Now, Nor Has It Ever Been, the Fear Index”  It is important to remember that VIX is not structured as a fear gauge, though tends to act as one for the most part.  But not always.  VIX represents the market’s best estimate of SPX volatility over the next 30 days, using a range of puts and calls.   Between the debt ceiling, Jackson Hole, the expiration of the eviction and student loan moratoria, and the return of Covid, there is no shortage of potential volatility inducing events that could be coming down the pipe.  The relatively elevated VIX could be reflecting investor concerns about any or all of them.

I have previously discussed the concept of “fully invested bears”.  Those are investors who are either unable or unwilling to be less than fully invested and using puts as insurance.  We have been seeing demand for protective puts, which are helping push up VIX.  I would argue that these investors are the embodiment of the wall of worry that the market must climb.  They are fully cognizant of the risks that might lie ahead, and in fact actively hedge against them.  But they are unwilling to bet against Mr. Market’s climb.

One can make the argument that markets are riskier when investors are truly complacent.  We’re seeing some risk getting priced in, so in a weird way we can say that we’re not all that complacent. Yet we certainly see risk being priced in, but at lower levels than we saw when markets were essentially risk-free.  Until we see otherwise, Mr. Market is continuing his gold-medal climb.

Disclosure: Interactive Brokers

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