Stocks are rallying so fast it’s creating a volatility dynamic that’s only been seen four times in history — and equity prices kept climbing following each instance.
Implied volatility in the S&P 500 and Nasdaq-100 has held firm despite record after record, with the VIX little changed since slipping below 18 in mid-April despite the S&P 500 up 7% since. It’s a byproduct of both aggressive call-buying in high-flying stocks and broad-market hedging by traders who see the VIX as a relative value to the implied volatility of popular sectors like tech and industry groups like semiconductors.
This dynamic has gotten so extreme that the correlation between the Nasdaq 100 index and the price of its 1-month call is positive for only the fourth time in the past decade, according to an analysis by Goldman Sachs & Co.
The average return after the two connect positively is 2.7% over the following month, compared to the average 1-month return of 1.5% over the period studied.
“Equity markets have crashed higher over the last month,” Goldman’s Brian Garrett wrote in a note to clients titled “Up Crash.” “Many participants have suggested this is fuel for an unwind, but the data does not corroborate.”
At around 0.4, the current correlation is the highest since Jan. 2017, which could suggest even more potential bullish action ahead: 2017 was the calmest year in stock-market history as measured by the VIX, which touched an all-time low of 8.56 in Nov. ’17. The S&P 500 notched a 20% rally that year, and the Nasdaq almost 32%.
The catch: the following quarter – the first quarter of 2018 – was “Volmageddon,” when the VIX surged to 50 and short-volatility ETFs imploded.
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