VIX Wavers Near the 30-Handle as Geopolitics Dominates Price Action

VIX INDEX OUTLOOK:

• The VIX has retraced from last week’s high, but it is struggling to break below the 30 handle decisively
• Geopolitical tensions may spark volatility on and off, but any explosive upward movement may be seen as an opportunity to position for a reversal
• Over the medium term, sentiment is likely to improve, helping markets to stabilize and reducing volatility across asset classes

Most read: S&P 500, DAX 40 – Equity Markets Remain Under Pressure as Fighting in Ukraine Intensifies

Volatility, as measured by the VIX Index, has been extreme in recent weeks amid heightened geopolitical tensions following Ukraine’s invasion by Russia. The index, constructed from put and call option prices on the S&P 500, hit a one-month high of 37.8 last Thursday before retreating to trade around the 30 handle this week.

The attack on Ukraine is a human tragedy and many investors believe the situation will get worse before it gets better, as President Putin seems intent on completing the military operation and seizing the entire country regardless of the costs. Against this backdrop, we may continue to see risk-off episodes and sporadic spikes in volatility in the financial markets in the short term.

The crisis in Eastern Europe, however, remains localized, so it poses little earnings risk for U.S. corporates and should not have a major impact on the U.S. economy, especially since the West has not moved to sanction Russia’s large energy exports.

More importantly, recent developments appeared to have prompted a dovish reassessment by the Fed, with FOMC Chair Powell favoring a measured rate hike this month and pledging to be judicious in removing accommodation amid high geopolitical uncertainty.

For all these reasons, I believe we are not headed for a high volatility regime, and it is only a matter of time before sentiment improves and the broader market stabilizes after Wall Street’s deep sell-off this year.

All in all, while short-term price action may be unpredictable in the coming days and weeks as the market remains stressed, I continue to view spikes toward the 40 level in the VIX as an opportunity to position for a reversal or to sell premium at rich prices. From a technical standpoint, one factor that seems to reinforce this theory is the fact that the S&P 500 made a new yearly low last week, but that bottom did not correspond with a new near-term high in the VIX.

VIX INDEX DAILY CHART

VIX Chart Prepared Using TradingView

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—Written by Diego Colman, Contributor