Stock Bulls May Soon Be Emboldened by VIX’s Drop to Key Level

(Bloomberg) -- The S&P 500’s so-called fear gauge is dropping toward levels that could further encourage stock bulls after a $2.6 trillion rally in the equity benchmark so far this month.

The Cboe Volatility Index -- or VIX -- has dropped 16 points since late October to about 24, as expectations for market gyrations ebbed following the U.S. election and news of a promising coronavirus vaccine. The VIX remains above its lifetime 19.5 average amid risks such as the still-escalating pandemic and U.S. transition to power.

Still, the VIX looks ready to go below 20, which “would be a major risk-on signal,” Tom Lee, co-founder of Fundstrat Global Advisors LLC, wrote in a note Wednesday, adding the move may also lead to “risk-on investment leverage.”

The slide in the VIX could even set up a scenario where volatility-focused funds buy stocks, potentially fueling gains. At the same time, some analysts have cautioned that the recent rally has gone too far.

Morgan Stanley strategists led by Phanikiran Naraparaju remain comparatively sanguine, writing in a note Thursday that “we expect realized volatility to resume the grind lower, typical of this stage in ‘early-cycle’ environments.” They recommend selling volatility to position for the cyclical decline.

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