New Energy Weekly – The Fear Index
This week, we’re diving into a market indicator that’s telling us what to expect from interest rates
You see, the Fear Index thinks we are in for another rate hike at the next Federal Reserve meeting.
The CBOE’s Volatility Index, known as the “VIX” reflects the market’s sentiment. It is a 30-day forecast of option price volatility. That’s how fast investors think the S&P 500 price will change. The larger the expected changes in the S&P 500, the higher the VIX value.
In simple terms, when the market is afraid, the VIX spikes. That’s why we call it the Fear index.
The underlying data comes from options prices. These are short-lived bets on the direction of the stock market. And they make an excellent barometer for how investors feel at a given moment. Here’s a chart of the VIX vs the S&P 500:
As you can see, the VIX captured several declines in the market:
- In August 2015, the VIX jumped 125% while the S&P 500 fell 10%
- In January 2016, the VIX jumped 70% while the S&P 500 fell 10%
- In December 2018, the VIX peaked at 170% and the S&P 500 fell 20%
- The biggest move came in 2020, when the VIX spiked 375% and the S&P 500 fell more than 30%
Just to be clear, we do not see that today. In fact, we see the opposite
A low VIX indicates periods when investors are happy. Declines in the VIX often correspond to periods of calm growth in the S&P 500. And we’ve seen that lately. The VIX began to fall in October 2022. That marked a short-term bottom in the S&P 500.
Since then, the VIX fell, the S&P rose, and we made money (mostly). However, in July 2023, that trend changed. The VIX rose from a low of ten to fifteen. That shows some uncertainty creeping in.
We believe that’s due to the anticipation of another rate hike by the Federal Reserve. We’ve talked about that in the past. It makes borrowing money more expensive. That’s a tool the bank uses to slow the pace of our economy.
If they hike rates again, it should be small. And it should calm the markets for a while. That way we can get back to the low VIX and rising markets again.
We’ll know more on Halloween, as the Federal Reserve’s next meeting in October 31.