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Brace for a pullback: S&P headed toward 2,192, UBS strategist warns

The ultra-low levels of expected and experienced volatility are unlikely to last, warns UBS equity and derivatives strategist Julian Emanuel.

"Overall market risks appear to be rising, yet volatility is low," Emanuel observed in a Friday research note.

With the Federal Reserve widely expected to raise rates several times this year, and with political unknowns building up, "we expect, in the fullness of time, that this low volatility won't persist, and that [resumption of higher volatility] could cause a market setback, because one or more of these items could be problematic," Emanuel said Friday on CNBC's "Trading Nation."

Even absent obvious potential catalysts, history would strongly suggest that expected volatility is set to rise. The CBOE Volatility Index, which uses options prices to measure the magnitude of the S&P 500's expected moves over the next given 30 days, generally has a "floor" at 10 or 11, and when around those levels, "it tends not to stay that way."

The VIX opened Monday trading at 12.16.

"What we tend to see over time is a reversion to a more normal VIX number, which is around 19," Emanuel pointed out.

Interestingly, the VIX is still high when strictly compared with actual realized volatility, which has been remarkably low. The S&P 500 hasn't fallen by more than 0.6 percent in any single session in 2017; it only rose by more than 1 percent on one day.

"While we do not expect the current bull market to expire imminently, a more aggressive Fed likely to hike on 3/15 even as economic data and growth proxies such as oil and high-yield bonds are softening, and the potential for fund flows to slow down nearer to the US tax deadline of April [18th] could cause a convergence of realized volatility toward implied, resulting in a broad market pullback with other such corrections of the past several years, toward the 200-day moving average near 2,192," Emanuel wrote.

In midday trading Monday, the S&P 500 was about flat, sitting at around 2,370.

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