A gauge of market fear isn't reacting the same way to the selloff that's marked the start of 2016 as it did when the S&P 500 hit its 2015 low in August.
While the Chicago Board Options Exchange Volatility Index, better known as the VIX, closed above 40 amid the carnage that followed the shock Chinese devaluation back in August, it's remained rather subdued lately, closing around 26 on Tuesday:
The VIX index tracks the implied volatility of the S&P 500 over the next 30 days based on at-the-money options prices.
Some have attributed the VIX's new-found stubbornness to the fact that the recent market sell-off began after the index had already climbed to about 18, thereby limiting the need for volatility-linked products to reposition en masse. "During the rare selloffs of 2013 or 2014, we typically started from an extremely low (12-14) level in VIX," said Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors.
According to Ken Veksler, director at Accumen Management, the subdued VIX is a function of the fact that the traffic in stocks has been one-way, with a dearth of big investors seeking to buy the dip. "Now while the price action of late has been undeniably brutal, it has also been rather unidirectional," he wrote in a note to clients. "Thus, the underlying volatility has been frankly absent. "
Convergex Chief Market Strategist Nicholas Colas is among those who noted this gap, and dug a little deeper into the data to look at implied volatility on a sector level derived from options prices for exchange-traded funds. What he found was surprising.
Technology stocks have seen the biggest decline in implied volatility relative to August (besides the lightly-weighted telecom sector) despite having modestly underperformed the broad market.
Here's the strategist:
Tech stocks are well away from their August 'VIX 'peaks (38 percent lower) and consumer staples (37 percent) aren’t far behind. The latter sector’s risk pricing makes sense; it has outperformed the broad market year to date. Technology, however, hasn’t managed the same trick. That means tech companies are the last line of defense against the broader market setting new lows.
Unlike 'FANG,' the four-stock group that became emblematic of the S&P 500's lack of breadth in 2015, the expected calmer waters are more broadly-shared throughout the tech space.