Volatility Traders Take $1.5 Trillion Tech Rout in Their Stride
(Bloomberg) -- After the $1.5 trillion wipeout in technology shares in less than a month, Wall Street fear gauges are flashing encouraging signals for would-be dip buyers.
Expectations for how much the Nasdaq 100 will move around in the coming weeks remain well below their January highs, after the biggest price swings in four months.
Meanwhile the Cboe Volatility Index, or VIX, is trading under the psychological threshold of 30, even as fears over rising U.S. yields threaten fresh losses in tech-heavy equity benchmarks.
While not quite a green light for stock bulls, it all suggests investors are taking the recent cross-asset rout in their stride.
“What it says to me is that we have a selloff but not a panic,” said Jim Carroll, portfolio manager at Toroso Investments LLC and a specialist in volatility strategies.
Stocks that have benefited from lockdowns and rich valuations fueled by low yields are getting hammered as part of the re-opening trade. For the past three weeks, fears over rising rates have sent the tech-heavy Nasdaq 100 into 10% correction territory after surging 48% last year.
Yet for all the selling, volatility markets remain relatively calm. In late January when the S&P 500 was swinging less and trading around 100 points lower than it is now, the VIX closed as high as 37, compared with 25 on Friday. It was trading at 24.2 as of 12:35 p.m. on Monday in New York.
Another way of thinking about it: Derivatives traders who have been building hedges in the run-up to this stock storm are seemingly reluctant to add more.
Demand for protection has kept the Wall Street fear gauge almost consistently over 20 since the Covid crash even as equities hit fresh highs. Reasons range from market technicals to worries over steep asset valuations and the spreading pandemic.
VIX futures “were quite elevated beforehand,” said Stefan Wintner, portfolio manager for volatility strategies at DUNN Capital Management LLC.
Now, there’s a budding divergence between the slump in stocks and the more sanguine signals in derivatives markets. Take futures on the VIX. The contracts have barely budged in the past three weeks, while some have even dropped.
As Dean Curnutt at Macro Risk Advisors points out, as of Friday the May VIX future was trading a point lower than its level two weeks ago, even though two-week realized volatility in the S&P 500 had jumped by some 15 percentage points.
While stocks boomed to records earlier this year, billions of dollars flooded exchange-traded products that buy VIX futures in expectation of coming price swings.
Now it appears traders are less inclined to bid up these stock hedges, perhaps reflecting a belief that this selloff will prove fleeting.
“People were fast to buy volatility at every single pullback,” said Kris Sidial of hedge fund Ambrus Group. “You’re going to be psychologically less inclined to be bidding that volatility after you’ve been bidding it and there’s no follow-through.”
With markets around the world obsessed with Treasury yields, the Federal Reserve’s Federal Open Market Committee on March 16-17 might be the next inflection point.
Yet Michael Purves of Tallbacken Capital notes that there remains little anxiety in stock options around the event -- another sign of relative calm among speculators on Wall Street.
“Some volatility is being priced into the FOMC,” Purves wrote in a note. “But is it enough?”
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