- Concerns of a new COVID-19 variant sent Wall Street's fear gauge soaring as much as 51% on Friday.
- The volatility surge could signal an end to the low volatility regime of 2021, according to Fairlead Strategies.
- This is the level the VIX needs to close above to signal a "difficult 2022" for the stock market.
US stocks plunged on Friday, with Wall Street's fear gauge soaring as concerns of a highly mutated variant of COVID-19 spread across markets.
The Cboe Volatility index, known as the VIX, helps measure the level of fear among investors. It jumped as much as 51% on Friday to a high of 28.02, alongside an 800-point plunge in the Dow Jones Industrial Average.
Fairlead Strategies' Katie Stockton believes the surge in volatility on Friday could signal an end to the low-volatility regime in 2021 that delivered more than 20% gains for the broader market, and the start of a "more difficult tape in 2022," according to a Friday note.
That's if the VIX closes above the key 25 level both today and next Friday, as the move higher would be confirmed on a consecutive weekly basis. That level represents a key risk threshold and "would suggest that the market has entered a high-volatility regime after having been in a low-volatility regime for most of 2021," Stockton explained.
Friday's move catapulted the VIX well above the 20 level, which is a key threshold monitored by quantitative and systematic investment funds that tend to add more equity leverage when the index falls below 20. That leverage is likely being pulled back on Friday as the risk-off trade hits everything from airline stocks to the energy sector.
On the flip side, stay-at-home stocks popular with growth investors like Ark Invest's Cathie Wood surged on Friday, led by names like Zoom Video, Peloton, and Teladoc.
Despite the sharp move in stocks on Friday, Stockton wouldn't be quick to react during the shortened post-Thanksgiving trading day, with markets closing at 1 p.m.
"The pullback comes at a time when many market players are out of the office, contributing to low volume and high volatility. Momentum has weakened enough to give us pause, but we would not be reactive today, rather awaiting a return to normal volumes next week," Stockton said.
The VIX pared its earlier gains and traded around 25.44 Friday morning.
