- The stock market has yet to find its bottom based on the current level of the VIX, according to DataTrek.
- Tuesday's brutal 4% sell-off in the S&P 500 was unable to nudge the VIX to levels often seen during stock market bottoms.
- "A VIX below 28 in the current macro environment seems like the wrong price to us," DataTrek said.
Chances that the stock market has found its bottom appear unlikely based on the current measurement of Wall Street's closely followed fear gauge, also known as the CBOE Volatility Index.
That's according to DataTrek co-founder Nicholas Colas, who highlighted in a Thursday note that the VIX's current reading of about 26 is too low to suggest a tradeable bottom is in, based on historical market data.
Indeed, Tuesday's more than 4% decline in the S&P 500 led to a 14% surge in the VIX to 27, which is one point below a one-standard-deviation move from its long-term average of about 20.
According to Colas, it's telling that the VIX was unable to hit a one-standard-deviation level on the same day the S&P 500 registered a four-standard-deviation move.
For comparisons sake, when the S&P 500 registered daily declines of more than 3.5% in 2020, the VIX traded at an average level of 38, a more than two-standard-deviation move from its average. Even in the first half of 2022, the VIX was at an average level of 33 when the S&P 500 saw a daily decline of more than 3%, according to Colas.
"The data clearly shows that outsized down days are coinciding with ever-lower VIX levels," Colas said. "We think the VIX is saying 'show me something new.'"
The VIX has likely already priced in elevated inflation, spiking interest rates, Fed policy uncertainty, recession fears, the Russia-Ukraine conflict, "and every other issue dominating the current market news cycle," Colas said.
So, what type of event would drive the VIX higher and signal that the stock market is closer to a tradeable bottom?
According to Colas, its corporate earnings volatility.
"To our thinking, there is only one logical answer: a pronounced decline in market confidence about corporate earnings power," he said. Earnings have held up remarkably so far this year, with the S&P 500 printing a record $57 earnings per share in the second-quarter.
"No one except Wall Street analysts think we can do much better than that over the next year, but nor do current S&P prices say we will do much worse," Colas said.
But even as the S&P 500 trades in line with its long-term valuation average, four decades of VIX market history suggest now is still not the time to buy stocks, he added.
"A VIX below 28 in the current macro environment seems like the wrong price to us, even if it is above its long run average," Colas said. "The worst-case scenario is that it reflects the beginning of a slow grind lower for corporate earnings. Not enough to shock, but still enough to erode investor confidence."
Ultimately, Colas would like to see the VIX move above the 30 level as a sign that a tradeable low in the stock market is in place.