The stock market has been acting jubilantly over the past month, with the S&P 500 up about 6% since the U.S. election and all three major U.S. stock indexes trading near all-time highs. Throughout the optimism, Wall Street’s so-called “fear gauge” has been trading near lows for the year.
The Cboe Volatility Index VIX was trading at around 12.9 on Friday, which is near the index’s six-month low. The VIX measures expected S&P 500 SPX volatility over the coming 30-day period by looking at options data. While it doesn’t directly measure investor sentiment, it’s often used to gauge how investors are positioning themselves against expectations of market volatility.
With the VIX trading near lows, the index is currently implying lower expected volatility in the immediate future.
“VIX is not explicitly constructed as a sentiment indicator,” Steve Sosnick, chief strategist at Interactive Brokers, told MarketWatch. “But from a practical sense, what it tells us also is there’s not a lot of institutional demand for hedging.”
Sosnick says that institutional investors tend to use VIX as a short-term hedge. That’s because when market volatility spikes or there’s a steep selloff, VIX tends to rise as well. This hedge helps protect large institutional portfolios.
But retail investors can gain exposure to the VIX, too — through buying an exchange-traded fund or exchange-traded note that tracks the VIX, buying VIX options, or buying medium- to short-dated puts on the S&P 500. However, volume on VIX products like the iPath Series B S&P 500 VIX Short-Term Futures ETN VXX and ProShares Ultra VIX Short-Term Futures ETF UVXY has been somewhat low recently. This means a lower number of investors are gaining exposure to the VIX.
Read more: This move by the stock market’s ‘fear gauge’ is historically bullish for the S&P 500
Although Sosnick admitted that he doesn’t have very granular data on what individual retail investors are trading on the Interactive Brokers IBKR platform, he can see the most actively traded tickers. Some of these tickers include small-cap stocks like VCI Global Ltd. VCIG, speculative plays like Unusual Machines Inc. UMAC and the bitcoin play MicroStrategy Inc. MSTR
