VIX Higher Than Actual Volatility Is Good News for Stock Bulls

A volatility measure hovering near the highest in two months is sending a bullish signal for a relentless stock rally defying eye-watering valuations.

Known as the market’s fear gauge, the Cboe Volatility Index is trading some 7 points higher than how much the S&P 500 Index has actually been swinging around for the past 20 days.

To Michael Purves, CEO of Tallbacken Capital, it’s a tell-tale sign that investors are piling into the bull market with their defensive hedges already in place -- softening the blow from flare-ups.

Add a historic number of stock winners over the past 200 days, and two key ingredients are in place for the rally to extend its staying power.

“This high premium to realized volatility actually helps reinforce the bullish trend,” Purves said. “If the spread to realized was very low we would be much more concerned about complacency.”

VIX Higher Than Actual Volatility Is Good News for Stock Bulls

Capping its eighth week of advances in 10, the S&P 500 has motored on despite everything from rising bond yields and historic valuations to hiring slowdowns. The last time JPMorgan Chase & Co. strategists pointed out a similar “bubble” in the VIX -- which tracks the price of equity options -- the S&P 500 proceeded to gain nearly 4%.

Both Purves and Sundial Capital Research Inc. founder Jason Goepfert also point to the high number of S&P 500 stocks above their 200-day moving average.

On average last month, 96% of stocks traded above their 200-day moving average, Goepfert wrote in a note Friday, making it one of the best periods for breadth in data going back to 1928. When that happens, equities usually power higher, he said -- though this time may be different with indexes at or near record highs.

“Overall, stocks held up well after other thrusts, especially over the next two to three months,” Goepfert said. “The biggest issue now is that the few other times these kinds of thrusts triggered when stocks were relatively close to their highs, only once did we see large, sustained gains right away (in 1982).”

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