Market Insider

The market's fear index just gave the green light to this comeback

Key Points
  • The Cboe Volatility index fell under 20 Wednesday, a level it has averaged for years and one that some traders watch as a kind of safety zone for the stock market.
  • The expiration of options could be affecting the price, but if the VIX continues to trade under 20, it could be a good omen for stocks.
Traders work on the floor of the New York Stock Exchange, (NYSE) in New York.
Brendan McDermid | Reuters

The Cboe volatility index's fall below 20 is a good sign for stocks, if it sticks.

"The VIX has been a leading indicator for the past two weeks. When it spiked, stocks came under pressure. When the VIX was down this morning and futures were down, it was signaling the market could rally," said Scott Redler, partner with Redler said when futures turned sharply lower after consumer inflation came in hotter than expected, the VIX didn't spike in response.

The VIX was trading at 19.28, off 23 percent Wednesday afternoon as stocks pushed sharply higher. The VIX had jumped to just above 50 last week, as stocks traded in wild swings.The Cboe volatility index reflecting expectations for 30-day volatility in the S&P 500, based on puts and calls.

"I think under 20 is a better scenario for the market. It's options expiration week this week, so there's a lot of noise with this drop in the VIX, which is spilling over into this rise in the equity market today," said Peter Boockvar, chief investment strategist at Bleakley Financial Group. "The market's celebrating like there's something good about higher inflation and interest rates. I think a lot of the trading is on the expirations."

Boockvar said he doesn't expect the VIX to stay below 20. "I think with this rise in rates I don't really expect it to. Twenty is the average since the 1990s. Being around 9 or 10 was not normal." The VIX was at single-digit levels in January, when it was at a low of 8.92 before rising to recent highs.

The S&P 500 was up 1.3 percent Wednesday afternoon, just below the key 2,700 level. The 10-year Treasury yield, meanwhile, was as high as 2.91 percent.