Clear skies ahead for the S&P 500 and other major indices?
- The S&P 500 is on track to end November up by more than 10%.
- However, the Volatility Index remains above 20.
- Investors can be both bullish and concerned at the same time.
The S&P 500 index is up 11% in November alone with one more trading day left. What makes the major index’s performance particularly notable is the fact it is lagging the Dow Jones index that is up 13% and the Nasdaq index that is up 12%, according to The Wall Street Journal.
An unusual rally
The S&P 500’s double-digit percentage gain since the start of November is certainly a welcome sign. The COVID-19 induced selloff in March and April erased years worth of gains and many investors expected another turbulent period amid the U.S. presidential election in early November.
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Meanwhile, the volatility index, also known as the “fear index,” has closed above 20 for 195 consecutive days. This streak hasn’t been seen since the peak of the financial crisis in 2009, according to WSJ.
The divergence between a volatility index above 20 and a bull market is very unusual. In six of the past eight periods when the volatility index traded above 20 for at least 100 sessions, the S&P 500 index had fallen.
What does this mean?
The fact that the markets marched towards all-time highs while the volatility index remains elevated signals investors still have “a lot of scars from what happened earlier in the year,” Chris Murphy, co-head of derivatives strategy at research firm Susquehanna told WSJ.
Other experts are showing the same sentiment.
“There’s so much uncertainty out there,” Stuart Kaiser, head of equity derivatives research at UBS also told WSJ. “Nobody wants to be on the wrong side of this.”
However, the sentiment isn’t shared among the investment community. Some hedge funds and traders are expecting the volatility index’s run above 20 to come to an end. For the first time since the start of the pandemic, there is a potential light at the end of the tunnel in the form of multiple vaccines.
In particular, hedge funds are the most bearish against the VIX since early August. By default, a bet against the VIX is a bullish directional bet on stocks.
Other bullish indicators include heavy call option buying tied to the iShares Russell 2000 ETF (NYSE: IWM), according to WSJ. The index of small companies is on track for its best month ever and investors appear to be confident the momentum will sustain moving forward as the rollout of one or more vaccines will support additional economic growth into 2021 and hopefully beyond.