Haymaker Daily
On volatility and a lack of precedent
Hello, Subscribers:
There’s a fascinating, and potentially ominous, development playing out in the volatility complex, one that closely echoes the topic we covered in yesterday’s Daily (Median 63-Day Rolling Stock Specific Risk). As the chart below illustrates, the spread between single stock vol (VIXEQ) and index vol (VIX) has just hit its widest point on record. We’ll put that in context by quoting Trader Ferg (from whom we sourced the chart), “index vol has never been this cheap relative to single stock volatility.” Not in the 2022 bear market, not even in the pandemic panic of 2020, nor 2018 in the midst of the “Volmageddon” market seizure, nor during the 2013 Taper Tantrum, has it ever been this elevated.
Historically, this kind of dislocation doesn’t persist because one of two things tends to happen: either the chaos brewing beneath the surface fades (and single stock volatility comes in), or more likely, a rude awakening occurs at the index level. Typically, it’s been the latter since volatility doesn’t just disappear, it migrates. And this chart suggests it’s about to migrate up the food chain, from stocks to sectors to the index itself. On its own, this doesn’t guarantee a major correction, but it strongly suggests the next leg of the market won’t be as smooth as the last.
David “The Haymaker” Hay
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