FA Center: New research claims the bear market won’t be over until the VIX says so.

by | Dec 21, 2022 | Stock Market

According to one prominent investment firm’s analysis of the VIX, the stock market has not yet experienced the capitulation that typically signals the end of the bear market. By capitulation, I’m referring to the deep despair that leads investors to throw in the towel and swear off equities. Though not every bear market ends with capitulation, most have. So Wall Street analysts are scouring the historical record for reliable indicators of capitulation.

The VIX — the CBOE Volatility Index
VIX,
-6.56%
—reflects option traders’ expectation of the S&P 500’s
SPX,
+1.49%
volatility over the subsequent month, with higher levels indicating greater expected volatility. Since 1990, the earliest year for which the CBOE has historical data for the VIX, its highest-ever close was 82.69 (in March 2020). Its lowest-ever close came in November 2017 at 9.14. It currently stands in the low 20s. A recent analysis by equity strategists at BNP Paribas concludes that the VIX is a reliable indicator of market capitulation and, therefore, useful for determining whether the bear market has come to an end. They found that the median VIX level at past bear-market bottoms was 40.5, well-above the VIX’s highest level hit (at least so far) in the current bear market (which is 36.45). Furthermore, since the firm found that spikes “in volatility have on average come at the same time as the trough in the market,” they conclude that the bear market has not yet hit bottom. The firm’s argument seems plausible, since the VIX has stubbornly refused to spike upwards during this bear market — no matter how much turmoil the market has suffered. Take what happened on Dec. 15, when the stock market suffered its biggest decline in three months — with the Dow Jones Industrial Average
DJIA,
+1.60%
slumping more than 750 points. The VIX that day closed up just 1.69 points, at 22.83. This closing level stands at the 74th percentile of the VIX’s historical distribution since 1990 …

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