One observer says that the return of a more traditional relationship between stocks and volatility could mean that the markets are about to have a “accident.”
Charles McElligott, a cross-asset macro strategist at Nomura, said that the market is moving from a long period of “spot up, vol up, crash up” behavior to a more normal one where stocks and volatility are negatively related.
Several things are causing this change in dynamics. These include traders’ efforts to keep volatility low through different strategies, rising optimism about an economic slowdown, and the upcoming U.S. presidential election.
Because of this, the market is more likely to have a “accident” of a sharp drop as volatility rises from low levels.
It looks like some people “still get the joke” that the next “accident” in the S&P 500 won’t be a normal 5% to 10% slow pullback or correction. Instead, it will be something much more “convex.” McElligott, who is known for his options-focused, color-coded emails, said, “So we are again seeing traders reload the VIX VIX calls trade.”
People who buy VIX call options can buy futures at set strike prices, which lets them make money if volatility goes up.
He did add one caveat, though: another big rise in Nvidia NVDA, -0.29% stock prices or a future core CPI reading of 0% could start a “euphoria” chase to the upside again.
This year, the S&P 500 SPX has gone up 11%.
