The most popular measure of fear in the U.S. stock market is drawing attention as it drops to fresh lows, signaling a level of confidence not seen in years. However, some investors are concerned the plunge in the volatility measure could be leading up to a bearish surprise ahead. The CBOE Volatility Index (VIX), commonly referred to as the fear gauge, is a measure of the market's expectations of volatility over the next 30 days based on the price of S & P 500 index options. The falling reading reflects that investors are paying less for protection against an index decline. While a reading above 20 often indicates more choppiness ahead, the VIX was last trading below 13. Last week, it reached a level not seen since before the pandemic in early 2020. Broadly speaking, the VIX has an inverse relationship with the S & P 500. When the VIX goes up — meaning more fear — the broader index falls. Conversely, when the VIX declines, the benchmark climbs. And, in fact, the VIX has reached its low level just as the S & P 500 is poised to register its best month of 2023, up in November by more than 8%. .VIX YTD mountain VIX For some investors, the low level confirms equities are in a bull market that started last October, and have further to gain on hopes the Federal Reserve is done hiking. But others worry where the VIX stands now is more a sign of complacency, meaning markets could be set up for a bad turn. "It's beginning to look a lot like 'VIX-mas,'" Jonathan Krinsky, chief market technician at BTIG, wrote in a note Sunday. "Seasonally speaking, VIX tends to bottom into late November before rising into mid-December. We expect to see a similar rise in volatility into December this year." Volatile spikes In June and September, when the VIX dipped below 13, the fear gauge quickly rebounded, and markets pulled back. BTIG's Krinsky anticipates this time around will be much of the same, and urged caution. Wells Fargo's Chris Harvey on Monday wrote that a low VIX is historically a bad sign for markets entering a new year. Since 1998, he said, equities have commenced a year with the VIX below a 14 handle just six times. In the years when the fear gauge spiked afterward, Harvey said the typical year-to-date drawdown is negative 7.2%, including 2020, and negative 3.4%, excluding 2020. He advised investors to go into defensive sectors such as health care. .VIX 5Y mountain CBOE Market Volatility Index, 5 years "We think 2024 will be a 'trader's market,' not a buy-and-hold situation," Harvey wrote. "We advise going against the grain, starting with a risk-averse stance in 2024 and repositioning on a VIX reversal." "Expect a volatile and ultimately flattish SPX in 2024 (4625), as valuation limits upside and rate uncertainty elevates downside risk," Harvey also said. A sign of further upside? To be sure, other market participants expect that the falling VIX could just signal the next leg in the stock market rally. Will Tamplin, senior analyst at Fairlead Strategies, said he expects the VIX is at near-term oversold levels, meaning stocks are due for some volatility. But he expects that will be "pretty brief and pretty mild." He noted, if the VIX breaks through the support level at 12.73 that would be a bullish development for S & P 500 — especially as the benchmark tests resistance at 4,600. In fact, if that bears out, Tamplin would watch for the next support level at 10.9, which the fear gauge hasn't reached since before the pandemic. .SPX YTD mountain S & P 500, YTD "The VIX has seen quite a drop. and it's at levels where it's bounced before. So, it's a natural place for the VIX to, in the near term, find its footing and stabilize," Tamplin said. "But we ultimately think, you know, beyond that, it's poised to go lower just given the low volatility cycle that's been in place." "There's still room for sentiment to get more bullish," Tamplin added. "We don't see a serious amount of complacency." Elsewhere, Oppenheimer's Ari Wald said any near-term volatility should be bought, as the market is set up for further gains. In 2024, Wald is bullish on the technology sector, saying he's confident in both the mega-cap tech stocks such as Apple, Microsoft and Nvidia, as well as in smaller names such as Cloudflare that should bounce back from their recent selloff. "We're kind of at this point where the market has run up a little bit. And there's some near term overbought conditions and some low VIX readings," Wald said. "I think what that is arguing for is that weakness should be bought in anticipation for higher highs over the coming weeks to months." At least when it comes to seasonal setup, most agree investors are in for a little choppiness ahead. The VIX tends to get more volatile in the final month of the year. The question is whether we are entering a new period of low volatility as the norm starting in 2024. "We don't think we are in a new regime and therefore as we head into December, a sub -13 VIX is likely a yellow light," Krinsky wrote in the note.
