VIX Signals Traders Want Proof It’s Safe to Buy the S&P 500 Dip

k2jy7]9ni(0meoy08e2ctubm_media_dl_1.png Bloomberg

Article content

(Bloomberg) — As stocks staged a powerful rally on Monday after President Donald Trump eased off his threats on Iran, the message among some money managers was clear: don’t get comfortable just yet.

Article content

Concern that more volatility may lie ahead was on display in Wall Street’s chief fear gauge, the VIX Index, which barely budged from its perch above 26 as the S&P 500 Index jumped almost 1.2% in its best day in a month. And a measure comparing the number of stocks moving up versus down on a second-by-second basis also hardly showed a mad dash for the asset class. 

Article content

Article content

Article content

While Trump’s decision to postpone strikes against Iran’s energy infrastructure eased a sense of panic that’s gripped Wall Street this month, traders say it’s too early to sound the all-clear on the market that’s still pricing, and re-pricing, the longer-term impact of the hostilities. With so much hanging in the balance, equity markets need more certainty that tensions won’t flare up again. S&P 500 futures were down 0.2% on Tuesday as traders grappled with a range of possible outcomes for the war. 

Article content

Article content

“Most of the folks I speak with are very worried about the duration of this conflict,” Tony Pasquariello, partner and global head of hedge fund coverage at Goldman Sachs Group Inc., wrote in a note to clients Monday. “The market has not yet priced a significant pinch to growth expectations.”

Article content

The S&P 500 settled at 6,581, or 70 points below its session high in the morning, as traders assessed contradictory headlines from the Middle East. Trump said the US would postpone strikes against Iran’s energy infrastructure after what he called “productive conversations” with the country, in comments that spurred confusion over the participants in the talks and parameters of a deal — especially after officials in Iran denied any talks had occurred.

Article content

Article content

The stock market is primed for a rally if tensions in the Middle East ease, according to Citadel Securities’ Scott Rubner. Many hedge funds, particularly multi-strategy firms that use short products to reduce exposure, have aggressively shorted exchange-traded funds to hedge against further downside. If tensions in the region ease and volatility subsides, those positions may unwind quickly. 

Article content

Read: Citadel Securities’ Rubner Sees Short Squeeze Fueling S&P Rally

Article content

The S&P 500’s rally on Monday was a much-needed reprieve for bulls who saw the index decline for four weeks in a row. Still, the benchmark gauge failed to reclaim its 200-day moving average, a technical level that had supported the index since May, and the setup remains fragile to some chart watchers. 

Article content

And the so-called Tick Index, which compares stocks moving higher versus lower on the New York Stock Exchange on a second-by-second basis, showed little urge to buy the dip. At its peak on Monday the gauge reached 1,850.00, below its intraday high on Thursday.  

Article content

The term structure of VIX futures has been flip-flopping in and out of inversion, reflective of unstable short-term implied volatility and a market driven by macro headline risk. And retail flows were muted on Monday, with individual investors taking profits and selling some winners after stocks soared, according to data from Citadel Securities.