VIX is down to low levels again- it might act as a hedge
After the last month’s easing rally in Europe and the US with hopes of lower interest rates, we think it’s a little early to buy for a long-term upside. The VIX can act as a hedge against a possible downward price rebound.
The overwhelmingly positive momentum for European and US stock markets continues to prevail. Over the past week, the Nasdaq has seen the most significant rise. The higher price/earnings (p/e) ratios imply anticipation of lower interest rates and yield requirements.
Significant stock indices performance in one week, one month and this year
The 10-year US Treasury yield has fallen back from a peak of just over 4.2% to 3.7%. The corresponding movement can be seen in two-year US Treasury yields, which peaked around 4.7% and have now fallen back to 4.4%. Much depends on the long-term rate of inflation, where there are indications of downward pressure on prices. The trucking market in the US, for example, had one of its most significant declines in early November due to retailers’ inventories already being filled. According to our sources, there are also vast stocks of electronics and computer accessories made in China waiting to be sold.
Big US tech companies have announced staff redundancies. A weaker labour market in the US also points to lower interest rates next year.
The Fed's Powell has made it clear that the central bank wants to see several months of evidence of a slowing inflation rate before possibly reconsidering its current aggressive interest rate policy.
US 10-year Treasury Yield (in %), two-year-chart (In USD)
Overall, we believe the stock market is entering a consolidation phase where a downward rebound cannot be ruled out. We may need to see a shakeout before a more sustained rally can begin.
One consequence of the predominantly positive stock market sentiment last month is that the VIX (US volatility index) has reached relatively low levels again. Buying the VIX can be a way to hedge your portfolio against a downturn.
Some areas could potentially develop into crises and negatively impact stock markets. Such scenarios include a financial crash in the form of the debt failure of any significant company or sector. Another risk is the war between Russia and Ukraine, with a rocket strike in eastern Poland illustrating the potential for an escalation of this war.
VIX, a daily one-year index price chart (In USD)
The VIX bottomed around 22.5 as of 11 November in a cyclical pattern of ups and downs. Meanwhile, the last peak of around 32 was reached as recently as October 12.
VIX, a weekly five-year index price chart (In USD)
The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence
Risici
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