US Fear Index Hits Record High... How Far Will It Soar?

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] The fear index in the U.S. stock market is soaring to an all-time high. Macroeconomic factors such as the spread of the novel coronavirus infection (COVID-19) and the sharp drop in oil prices, combined with technical selling based on pessimism, are negatively affecting supply and demand, amplifying the index's rise.

According to Bloomberg on the 18th, the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) recorded 82.69 points on the 16th (local time), up 24.86 points (42.99%) from the previous day. This is a record high surpassing the previous peak of 80.74 points set on November 21, 2008, during the global financial crisis. As volatility in the U.S. stock market has maximized recently, the VIX rose from 18.84 points at the end of January to over 40.11 points at the end of last month, then soared to 82.69 points in about half a month, more than doubling.

As the VIX surged to a record high, related Exchange Traded Notes (ETNs) listed on the domestic stock market recorded new highs and rose. According to the Korea Exchange, Shinhan S&P500 VIX S/T Futures ETN B closed at 44,000 won, up 3.90% (1,650 won) from the previous trading day. This stock has risen 125.5% this month alone. During the same period, QV S&P500 VIX S/T Futures ETN B and Samsung S&P500 VIX S/T Futures ETN(H) B also rose 123.5% and 120.7%, respectively, with all VIX-tracking stocks recording returns of more than double.

The VIX is an index that reflects the market's expectation of volatility over the next 30 days for S&P 500 index options listed on the Chicago Board Options Exchange. It rises as volatility increases and falls when stable, moving in the opposite direction to the market, which is why it is called the "fear index."

The recent surge in the VIX is fundamentally due to the spread of COVID-19 and the sharp drop in oil prices, which have increased market volatility. However, the current VIX level is interpreted as a result of these macro factors combined with supply and demand factors. Volatility management funds sell stocks when volatility rises, and as extreme pessimism spreads in the market, selling triggers additional selling, creating a self-fulfilling fear that negatively impacts supply and demand. In other words, if there is a volatility management fund targeting 10% volatility, theoretically, all stocks have been technically sold. According to Shinhan Financial Investment, the size of volatility management funds is about 800 billion dollars, and assuming a 20% rebalancing, a supply and demand burden of 160 billion dollars arises.

Market attention is focused on the future direction of the VIX index. On the 17th (local time), the VIX remained around 75 points, down about 8% from the previous day. Since some of the factors driving the VIX surge are in the process of being resolved, buying the VIX at this point is analyzed as a strategy with high opportunity cost.

Researcher Seonghwan Kim of Shinhan Financial Investment said, "The rebalancing of volatility management funds has passed its peak, and disappointment over policies has also eased," adding, "The possibility of a market volatility surge greater than what was witnessed last week has decreased." In conclusion, he believes the VIX has likely reached its peak. Researcher Kim diagnosed, "The VIX has pre-reflected recession and financial system collapse. Although the spread of COVID-19 continues, policy cooperation to block adverse effects on the financial system and the economy has also begun, so the opportunity cost of buying the VIX will increase."

This content was produced with the assistance of AI translation services.