Rare VIX, Rates Anomaly May Be ‘Powerful’ Stocks Buy Signal

(Bloomberg) -- The gap between volatility gauges for stocks and Treasuries has climbed to a level that may portend gains in U.S. equities, according to The Leuthold Group.

While the Cboe Volatility Index and the ICE BofA MOVE Index have surged as the hit to growth from the coronavirus pandemic weighs on sentiment, only the Treasuries gauge has significantly dropped since. The VIX remains around its 99th percentile and the MOVE index has collapsed to around its 16th percentile as the Federal Reserve staged a massive intervention, according to analysis going back to 1990 from Jim Paulsen, the firm’s chief investment strategist.

“This relatively rare condition of intense stock market fear, combined with a generally calm bond market, has proved to be a powerful combination for ensuing stock market returns,” Paulsen wrote in a note Tuesday.

When the VIX is above the 80th percentile and MOVE is below the 50th percentile, the average annualized S&P 500 price performance has been “remarkable -- at nearly +21% compared to only a little more than +7% the rest of the time,” he said.

The MOVE closed Wednesday at 75.71, compared with its average 92.8 since the beginning of 1990, according to data compiled by Bloomberg. The VIX ended the day at 43.35 and would have to fall below 24 to get out of the top quintile from the past 30 years, Paulsen said.

With both gauges well within the levels that give off bullish signs for equities, “this signal may remain positive for stocks in the foreseeable future,” Paulsen said.

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