Not Just Nvidia, Market Turbulence Escalates Amid Vix Spike Over 150% – Where Is It Heading?

Last week's market turbulence spilled into Monday, leaving investors on edge as the major U.S. stock indices braced for another volatile day. The CBOE Volatility Index, or VIX, surged over key 50 levels before the market opened on Monday, marking its highest level since April 2020. So much so that futures on the Cboe Volatility Index have inverted, a signal that the here-and-now uncertainty is higher than that further down the line. This spike has prompted a flurry of activity among market participants, as fears of a potential recession continue to mount.

The VIX, often referred to as the "fear index," rose sharply to 50. This jump followed a settlement at 23.4 on Friday, up significantly from levels below 17 it has been for the most part of the year. The VIX, based on options prices tied to the S&P 500, measures market expectations for volatility over the next 30 days. Historically, the VIX has spiked during periods of market uncertainty, reaching an all-time high of 82.69 in March 2020 during the onset of the COVID-19 pandemic, and previously hitting 80.86 during the 2008 financial crisis.

The sell-off wasn't confined to U.S. markets. Japan's Nikkei 225 and Topix dropped over 12% on Monday, marking the worst day for the index since "Black Monday" in 1987, and confirming a bear market. South Korea's Kospi Index also fell 8.77%, triggering circuit breakers that halted trading temporarily.

The recent market volatility can be attributed to multiple factors. Concerns about the Federal Reserve's timing on interest rate cuts following weak jobs growth have heightened market anxiety. "The fact that we had such a huge spike in volatility on Friday is emblematic of the end of a short-term negative move in the stock market," said Steve Sosnick, chief strategist at Interactive Brokers LLC. However, he cautioned, "It doesn't necessarily tell you about the long-term cycle."

There is also a debate among economists and strategists about the underlying health of the U.S. economy. "The U.S. consumer is still in a relatively healthy, fairly normal position, which means the U.S. economy is relatively secure," said Samy Chaar, Chief Economist at Lombard Odier. However, Hani Redha of PineBridge Investments, which sold stocks on Friday, warned, "The risk-reward is not attractive here yet, given the initial conditions, which were stretched."

Another potential reason for the sell-off is the unwinding of the JPY carry trade. Minutes from a June Bank of Japan policy meeting revealed that at least two board members called for an early interest rate hike, signaling a hawkish stance that could lead to further increases. This caused a sharp appreciation of the yen, which has been a key driver of global markets. Cedric Chehab, global head of country risk at BMI, noted that the hawkish Bank of Japan "caused an implosion of the carry trade over a short-term basis," which, combined with weak U.S. manufacturing data and volatile earnings reports, has contributed to the recent market downturn.

Historically, a rapid spike in the VIX has often been followed by a period of falling volatility and rising stock prices. When the VIX index experiences a sharp increase—such as the one triggered last Friday, where it jumped 95% from its bottom within a year without a 20% pullback—historical data suggests that the VIX tends to decline by an average of 11% in the following week and 34% over the next year. Concurrently, the S&P 500 typically sees an average increase of 2% over the next month and 12% over the next year. This historical pattern provides a glimmer of hope for investors looking for a rebound.

Some analysts maintain a cautiously optimistic outlook.

Claudia Sahm, a former Fed economist, argues that despite recent labor market weaknesses, household income and consumer spending remain resilient. "I’m not concerned right now that the U.S. is in a recession," she told Fortune, while acknowledging that economic downturns can build slowly before intensifying.

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, also advises caution but does not foresee more than a 5% to 10% market decline. "I think we’re going through a pothole, and we’re going to stick the soft landing on the other side," she said, recommending investments in value and cyclical sectors, particularly financials and utilities. Financials have gained in the second half of election years, no matter which party wins the White House. RBC data shows strong, mostly double-digit gains for the sector in the second half of presidential election years going back to 1992. The only year with a decline in the sector was during the financial crisis in 2008.

Conversely, some strategists warn of more significant risks ahead.

Bank of America strategists noted that the market is overdue for a pullback, particularly as we enter August and September, historically weak months for the S&P 500. "We also find ourselves heading into August and September, a period accompanied by seasonally weak S&P 500 returns. With the U.S. election in November, we note that prior presidential election years have seen the VIX increase by about 25% from July to November," the strategists wrote. They do not forecast a bear market in the near future but emphasize the potential for increased volatility.

Bill Gross, known as the "Bond King," expressed a bearish view, suggesting that investors should consider selling recoveries rather than buying dips. "There are very few 'bull stocks' right now," Gross commented, pointing to vulnerabilities in sectors like pipeline master limited partnerships, banks, and financials. Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist, also noted that elevated realized volatility could limit how much leverage funds use in a rally, further complicating the market outlook.

When market volatility spikes, with moomoo, investors can utilize various options strategies to manage risk and potentially enhance returns.

A covered call involves holding a long position in an underlying asset, such as a stock, and selling a call option on that same asset. High volatility increases options premiums, allowing you to earn more income from selling call options. To implement this strategy, you start by owning the shares of the stock you want to write calls on. Then, you sell a call option with a strike price higher than the current market price of the stock. By doing so, you collect a premium from selling the call option. If the stock price remains below the strike price, you keep the premium and retain your shares. However, if the stock price exceeds the strike price, you may have to sell your shares at the strike price, locking in a profit but capping your upside.

A covered put involves holding a short position in an underlying asset and selling a put option on that same asset. High volatility boosts put options premiums, allowing you to earn more income from selling put options. To implement this strategy, you start by shorting shares of the stock you want to sell puts on. Then, you sell a put option with a strike price lower than the current market price of the stock. By doing so, you collect a premium from selling the put option. If the stock price remains above the strike price, you keep the premium and your short position. However, if the stock price falls below the strike price, you may have to buy back the shares at the strike price, limiting your downside.

A short put involves selling a put option without holding a corresponding short position in the underlying asset. High volatility increases put options premiums, making it more attractive to sell them. To implement this strategy, you sell a put option on a stock you are willing to own. By doing so, you collect a premium from selling the put option. If the stock price remains above the strike price, you keep the premium as profit. However, if the stock price falls below the strike price, you may have to buy the stock at the strike price, effectively purchasing it at a discount (strike price minus the premium received).