- The stock market could still have more upside ahead if Wall Street's fear gauge falls below a key technical level.
- If the VIX undercuts 15, Katie Stockton of Fairlead Strategies expects a continued low-volatility environment for stocks, according to a Monday note.
- The volatility index fell half a percent to the 15.34 level on Monday.
The stock market's record-setting year could continue into year-end if Wall Street's fear gauge falls below a key technical support level, Fairlead Strategies founder Katie Stockton said in a Monday note.
The CBOE Volatility index, known as the VIX, helps gauge the level of fear among investors and recently traded at 15.29 Monday morning.
"The VIX held support near 15 last week after a hard test, preserving its seven-month trading range. Short-term oversold conditions in the VIX mirror short-term overbought conditions in the SPX, such that support should continue to hold, for now," Stockton explained.
But if the 15 support level doesn't hold for the VIX, that should be a bullish risk-on signal for stocks, according to Stockton. "A breakdown [below 15] would extend this low-volatility cycle."
The VIX has declined by 39% since its early October high of about 25. Over the same time period, the S&P 500 surged 6% to new record highs. A break below 15 wouldn't be out of the norm for the VIX, as it traded below that level for years prior to the pandemic.
Throughout much of 2017, the VIX ping-ponged between 10 and 15. The S&P 500 went on to return about 20% that year. And from 2018 to the beginning of 2020, the VIX traded below 15 for months at a time as the stock market continuously surged to record highs.
A lower VIX is one signal that often triggers systematic and quantitative investment funds to increase their leverage and add more exposure to stocks.
