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The oil price is once again well on its way toward new all-time highs (for anyone who forgot: that’s also one of the reasons we had the -10% correction from January to end of March – largely driven by rising oil prices). On top of that, the S&P 500 just casually delivered a “nothing to see here” rally of almost 14% in 20 trading days.
At the same time, the Dispersion Index keeps rising, which basically means: the index is increasingly being driven by a few heavyweights rather than broad market participation – how convenient that the largest position in the index, Nvidia, is currently trading at its lowest put/call ratio in over a year (0.37), while also attracting massive call volumes from retail investors. (Who, of course, are always right.)
Meanwhile, the Left Tail Index is back at January levels, meaning downside protection against a decent correction is currently “cheap.” But who needs hedges when everything keeps going up.
The Constituent Volatility Index – i.e. the average volatility of individual S&P 500 stocks – is also trending higher. Fair enough, earnings season, nothing unusual. But what’s interesting is that at the same time volatility on volatility is falling, with the VVIX declining. So while single-stock volatility (VIX-equity) is rising – and the index itself is literally built from those same stocks – the “volatility of volatility” is dropping. Which, of course, makes perfect sense.
In the previous chart, you can also see the strong correlation between new 52-week lows (red) and the VIX (turquoise). And purely coincidentally, we’re again at a level in the lows that has historically often preceded rising volatility – usually accompanied by corrections in the index.
Just like the fact that the VIX typically sees very low call and put volume exactly when nobody expects volatility to rise. And once it finally does, people slowly start to think that maybe hedging wasn’t such a bad idea after all. :D