After hitting multi-year highs in October, the VIX is back in the low teens as traders have seemingly put every major concern in the rearview mirror and hit the buy button. But could too much optimism be a bad thing?
Though the VIX is sometimes called "Fear Index" on Wall Street, it really measures the cost of insuring stocks in the S&P 500. The more nervous investors are, the more they are willing to pay for insurance in the form of put options. As those fears decline, the value of the insurance also falls, resulting in a lower VIX.
With stocks now at a record, it would seem the only thing investors fear is missing out on more gains. And there may be good reason for that: The last four times the VIX spiked above 20, the S&P 500 gained an average of 9.8 percent just 90 days out. For those without their calculators handy, that projects an S&P 500 price of about 2,045 by January.
However, with the S&P 500 now near those levels, has the market gone as far as it can go?
"There is a tremendous incentive right now to buy equities in the face of all this excess liquidity," said Gina Sanchez, founder of Chantico Global. "You are getting paid near zero to hold cash. I think that you're getting those rises in equity prices not really because equities are necessarily a great value or because there aren't concerns, it's just primarily because there's nowhere else to go. As long as that's the case, money will flow in, and you will see a bounce."
For now, the technicals are also bullish on the S&P 500, according to Ari Wald, head of technical analysis at Oppenheimer & Co.
"We've run the numbers," said Wald about the VIX. "You can buy spikes. Those are your buying opportunities, especially when the trend is good."
However, Wald has a caveat: Low readings on the VIX are not signals to exit the S&P 500. "The fact that we're back to the lower end of the VIX range isn't a reason to sell," he said.
In the meantime, Wald remains bullish on the S&P 500 for four reasons:
- He sees a secular bull for equities.
- It is rare for a bull cycle to end before the Fed starts to raise interest rates.
- There's very little competition to stocks.
- A very strong seasonal period between the months of November to April. The S&P 500 has gained an average of 13.9 percent between those months since 1950.
"We want to own the S&P 500," Wald concluded. "If you get another VIX spike, you want to buy it."