The VIX is not moving. Société Générale says that another measure of instability is a red flag.

Things keep going up and down, which is making buyers nervous. The S&P 500 index SPX 1.07% fell again by 1% on Wednesday morning, but it quickly rose again at the end of the day, ending the day with a 1.1% gain.

On the other hand, the CBOE VIX index VIX 0.51%, which is based on options and is known as Wall Street’s fear gauge, was not too worried. It’s below 18 right now, which is lower than its long-term average of about 19.5.

Solomon Tadesse, head of North American Quant Equity Research at Société Générale, says that the VIX is flawed because it only shows what is happening now and not what will happen in the future.

In other words, it’s helpful to know how worried people are about the market right now, but it’s not very useful for buyers trying to guess what will happen next.

He also says that it is a measure of volatility for the whole market, not just for individual companies based on their assets or financial health.

So, Tadesse believes that “it would make sense to look for signs of stress in the performance and volatility of the weakest part of the equity market rather than the aggregate market, which tends to favour the biggest, most profitable, and usually better financed firms.”

This is why SocGen made the JunkVIX, its own name for the Junk Equity Vol Index, in 2018. The measure looks at how volatile things are in what Tadesse calls the “low-quality sub-segment” of the market. This is made up of low-quality companies that often have too much debt and weak balance sheets.

Tadesse says that the idea is that if there is systemic distress in the market, an early warning sign should show up in this most vulnerable market segment of highly leveraged and highly volatile stocks before it affects the whole market.

“This could be the case because if the stock prices of weak companies start going down, it not only makes the systemic problem worse by increasing implied leverage, but it could also be an early sign that investors are becoming less willing to take risks with their balance sheets,” he says.

The following charts show that historically high JunkVIX numbers have often come before what Tadesse calls “major” market selloffs.

Tadesse says that recent jumps in the JunkVIX have been signs of bad market events, like the “Volmageddon” in February 2018, the market decline caused by tightening later that year, the market slump in 2022, and even the pandemic crisis in early 2020.

As the final chart shows, following a summer period of meek volatility the JunkVIX began to climb in late July, and moved into what Tadesse terms “risk-averse territory” by August 1.

“Despite normalization of markets after the August jitters, the ‘JunkVIX’ remained elevated, reaching extreme from late-August on, foreshadowing the recent selloffs,” says Tadesse .”While markets seem stabilized this week, could the persistently elevated JunkVIX be a precursor of a prolonged market distress in the horizon.”

Markets

Futures on U.S. stock indexes ES00 0.13% YM00 0.15% NQ00 0.09% are up early Thursday because benchmark Treasury yields TMUBMUSD10Y 3.681% are going up. While oil prices CL.1 1.87% rise and gold CL.1 1.87% trades around $2,518 an ounce, the dollar index DXY 0.04% stays the same.