The VIX Just Revealed an Optimistic Signal for U.S. Stocks

(Bloomberg) -- Market turbulence has calmed down since the mid-March extremes, but a couple of recent moves may bode particularly well for stocks.

The Cboe Volatility Index, or VIX, closed below its second-month future on Monday for the first time since Feb. 21, going back to a more typical structure. Since contracts dated further out would tend to carry more uncertainty than those closer in, they would normally trade higher -- though that hadn’t been the case in recent weeks because of the massive concern caused by the spread of COVID-19 and ramifications for public health, economies and financial markets.

The VIX Just Revealed an Optimistic Signal for U.S. Stocks

Similarly, the S&P 500 Index’s three-month call implied volatility went above its 30-day volatility on Friday, a phenomenon that bodes well for equities in the medium term, Susquehanna Financial Group LLLP noted.

“Since 1990 there have been 11 times SPX term structure (90-day/30-day) closed over 1.0x for the first time in 30 days,” Susquehanna derivatives strategist Chris Murphy wrote in a note Monday. “The index is relatively flat for the first two weeks afterward and finishes one month later up on average 85 basis points.”

The VIX Just Revealed an Optimistic Signal for U.S. Stocks

Once volatility reverts to upward-sloping after spending at least a month inverted, small-cap stocks tend to outperform in the following month, Murphy said. He recommends that investors who expect smaller companies to shine in the next few weeks buy May $133/$138 call-option spreads on the iShares Russell 2000 exchange-traded fund.

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