Go on ‘High Guard’ Against U.S. Stock Volatility, LPL Warns

(Bloomberg) -- U.S. stock swings may be poised to increase into the end of September.

The Cboe Volatility Index, or VIX, is pushing higher after ending Friday at 15.32 -- its greatest level in two weeks. That came on a day with quadruple witching, when options and futures on indexes and equities expire, so extra price swings amid heavier-than-normal volume weren’t that surprising. But a reading just above 15 isn’t terribly volatile when one considers that the markets have endured a spate of central-bank decisions, trade-conflict ups and downs, the attack on Saudi oil facilities, tweets from U.S. President Donald Trump and more.

“With all of those scary headlines, stocks are actually in the midst of one of the least volatile two-week stretches we’ve seen in years,” Ryan Detrick, senior market strategist at LPL Financial, said in a note on Friday. “September is historically known as one of the worst for stocks,” he added, though the S&P 500 was up 2.2% in the month.

In fact, that Friday close for the VIX is below the gauge’s 2019 average of about 15.9. And it comes as the S&P 500 sits at 2,992.07, just a bit more than 1% below its record high from July.

Can all this calm last? Deutsche Bank AG is skeptical.

“Realized volatility in U.S. equities has fallen sharply over the last two weeks to its lowest levels in a year, near the lowest on record in this cycle, a far cry from the extremely elevated levels at the beginning of the month,” strategists including Parag Thatte and Binky Chadha wrote in a note Friday. “It is rare for volatility to stay at such low levels and we are likely to see a pick up in the coming weeks, especially if the trade conflict escalates with the S&P 500 near new highs.“

Nomura Securities International Inc.’s Charlie McElligott has been warning of the potential for stocks to trade lower between options expiration and month-end, a point he reiterated on Monday. “Demand flows” from overwriters and corporates disappear after expiration and as a blackout on stock buybacks comes, he said.

“With the S&P 500 up near our fair value target of 3,000, we would be on the lookout for this sea of tranquility to get rougher at any time,” Detrick said in his note. “In fact, according to historical calendars, we may need to be on high guard for the second half of September.”

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Dave Liedtka

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