Wall Street's fear gauge fell to its lowest level in 3 years just as a new bull market hits stocks.
The decline in the VIX suggests that the stock market has entered a regime of low volatility following the bear market of 2022.
"We think this low volatility should be embraced as another sign that we are moving out of the bearish regime of 2022," Carson Group's Ryan Detrick told Insider
Wall Street's fear gauge closed at its lowest level in more than three years on Friday, suggesting that the stock market entered a new regime of low volatility following the bear market of 2022.
The S&P 500 is also on the verge of kicking off a new bull market, sitting less than a half percentage point away from closing above 4,292, which is the threshold that would mark the bullish milestone.
A new bull market starts when an index surges 20% from the lowest close of its bear market. The Nasdaq 100 already entered its bull market at the end of March.
According to DataTrek Research co-founder Nicholas Colas, the decline of the VIX to pre-pandemic levels signals that both economic and market conditions are closer to pre-pandemic levels than they might seem.
"We won't make too much out of what is a 1-day datapoint, but seeing the VIX break down to its pre-March 2020 levels is certainly a noteworthy development and merits attention," Colas said in a Monday note.
Carson Group's chief market strategist Ryan Detrick told Insider on Monday that the breakdown in the VIX is a signal that should be embraced by investors, rather than fought.
"What most investors tend to forget is that periods of low volatility can last for years, much like periods of high volatility can last for years... we think this low volatility should be embraced as another sign that we are moving out of the bearish regime of 2022," Detrick said.
And such a decline in volatility, at the same time as the stock market jumps to its highest level since August, suggests to Detrick that there could be more upside ahead.
"We wouldn't be surprised at all if this new bull market would continue much longer than most think and the VIX will also stay consistently beneath 20. The truth is the economy continues to surprise to the upside and with a strong consumer and better housing and manufacturing data in H2, continued strong stock prices and lower volatility would be perfectly normal," Detrick said.
And while a low VIX can suggest that stock market investors are not paying enough attention to potential risks, Fairlead Strategies founder Katie Stockton doesn't think we've arrived at that threshold yet.
"While still indecisive, the breakdown [in the VIX] suggests that sentiment is NOT too complacent," Stockton told Insider on Monday, before adding that a held-down VIX could signal further upside in stocks is likely.
"The breakdown below support near 18.5 was significant too, showing a shift out of the high-volatility regime and then giving way to a breakout by the S&P 500. A near-term spike would be made less likely by confirmation of the breakdown on a close [below] 15.4 this Friday. This would support upside for the S&P 500 in the coming weeks, which we expect already for other reasons," Stockton said.
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