Market fragility lingers as VIX climbs even with U.S. stocks rising to peaks, BofA says

Some investors appeared increasingly nervous in recent weeks, reflecting the market’s fragility, even as major U.S. stock benchmarks rose to fresh new peaks in recent weeks, according to BofA Global Research. 

The Cboe Volatility Index, known as the VIX, has been rising despite the S&P 500 index posting new highs, BofA analysts said in an equity derivatives report Tuesday. The S&P 500
Dow Jones Industrial Average
and Nasdaq Composite
each posted record highs Monday, though they were trading down Tuesday afternoon.

This chart in BofA’s report shows the increase of the VIX since early July.

“Despite last week’s sharp rebound in large-cap U.S. equities to new all-time highs, volatility markets are not sending the same ‘all clear’ signal,” the analysts said. “Markets remain historically fragile in 2021.”

Stocks tumbled Monday, July 19, with the Dow seeing its biggest slide since October 2020, but the three major U.S. equities benchmarks went on to book gains for the week along with fresh records.

Meanwhile, the VIX gradually rose to around 17.5 on July 26 from about 15 on July 2, according to the BofA chart. The VIX
was trading higher Tuesday afternoon, at about 20.3, as stocks were declining, according to FactSet data, at last check.

“In addition to pricing in elevated fragility risk, the VIX market and SPX options appear increasingly concerned about the risk of a hawkish turn by the Fed at Jackson Hole” in August, the analysts wrote in the report. The Federal Reserve will be gathering for a conference in Jackson Hole, Wyoming on August 26 – 28, with many investors anticipating a possible announcement on tapering at that time. 

Read: How the 10-year Treasury rate and S&P 500 performed when the Fed tapered in 2013

A BofA fund manager survey this month found investors expect the U.S. central bank to announce a tapering of asset purchases either at Jackson Hole or at the Federal Open Market Committee in September, according to the research note. 

Meanwhile, the S&P 500 index was trading down about 1% on Tuesday afternoon, opening up another opportunity for investors to consider buying the dip.

“The popularity of the “buy-the-dip” phenomenon in U.S. equities continues to rise at the same time markets are recording near a record number of sudden fragility shocks,” the BofA analysts warned in their note.

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