New Quant Fear Index Still Flashing Red for Stocks at SocGen

(Bloomberg) -- A new indicator of equity market distress is showing elevated readings that may signal more losses to come for stocks, according to Societe Generale SA’s quantitative strategy team.

High levels on the French bank’s “junk equity” volatility index have historically been followed by negative equity returns, their research showed. The gauge stood at the 72 percentile mark on Feb. 12, up from 66 on Jan. 30, the group, headed by Andrew Lapthorne in London, said in a note Tuesday.

New Quant Fear Index Still Flashing Red for Stocks at SocGen

“Readings above 66 percentile indicate elevated market stress and a risk-averse market environment and have been shown to be correlated with down markets on average,” they wrote. “Readings below 33 percentile indicate a relatively ‘risk on’ environment shown to be associated with subsequent market performance.”

The index focuses on volatility in the most highly levered and volatile stocks. If there are “systemic distresses” in the market, this group of equities should provide an early-warning sign, the strategists wrote in a separate report earlier this month when they outlined the mechanics of how their new gauge works. SocGen’s index measures differences in volatility between companies with strong balance sheets and their weaker counterparts over time.

Global stocks are down more than 7 percent from record highs reached in January as volatility spiked and a wave of selling gripped traders around the world. Fund managers reported cutting their weightings of both equities and bonds and accumulated the biggest net overweight cash position since the 2016 U.S. election, according to a Bank of America Merrill Lynch survey released Tuesday.

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