Traders appear to foresee some market turbulence ahead.
As stocks slipped a bit on Wednesday, the CBOE Volatility Index rose to its highest level since just after the November election of Donald Trump. While the VIX generally moves in the opposite direction as the S&P 500, it is notable that the tick higher in expected volatility has come even as actual volatility has remained extremely low.
At a level of about 16, the VIX is at "a notable premium to SPX 1-month realized volatility … and especially so when you consider that [the VIX] is up over 2 points in 2 days with the SPX barely changed," Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, wrote in a Wednesday morning note.
That is to say, while some have noted in sometimes anxious tones that the VIX has remained low as compared to historical averages, the real story is that the VIX is markedly high as compared to actual market moves.
The VIX measures the size of the S&P 500's expected moves over the next 30 days, and consequently tends to run just a bit hotter than volatility over the past 30 days. Yet one-month realized volatility is just 6.7, meaning the VIX is at a roughly 9-point premium, which Chintawongvanich calls "highly unusual."
That said, he notes that implied volatility was also at a large premium preceding the U.K. referendum to leave the EU and the U.S. presidential election. The obvious conclusion is that the market is now similarly preparing itself for the French presidential election, which is set to be held on April 23. Some fear that a populist candidate could prevail, which may cause more problems for the European Union and thus for economic stability.
Chintawongvanich's case is bolstered by the fact that April VIX futures are trading well above May and June VIX futures, and even above July and August VIX futures. This condition, known as "backwardation," is about as rare in the VIX market as its technical name makes it sound. It indicates that traders as a group think expected volatility will peak just before the French election, and then slide again once the actual results emerge.
Of course, there may be a bit more to it. According to Dennis Davitt, portfolio manager with Harvest Volatility Management, the move in U.S. expected volatility is a reaction to European expected volatility, which has "exploded higher."
"A lot of people are short vol in Europe, and try to hedge it by buying vol in the U.S," Davitt said Tuesday on CNBC's "Power Lunch." In other words, the VIX may be rising due to the knock-on effects of hedging decisions.
Whatever the precise cause, the rise in the VIX might be a contrarian bullish indicator.
"The last four times the VIX index has moved above its 200-day moving average, we have seen the market move higher by about 2.6 percent over the next for weeks, and 6.7 percent over the 13 following weeks," Craig Johnson, senior technical research analyst at Piper Jaffray, said Tuesday on "Power Lunch."
In other words: "We should buy this fear."
To be sure, "fear" is relative. The VIX still remains below its long-term average range of 18 to 20.