Recent market activity has shown a significant rally in stocks, creating a unique volatility dynamic that has only occurred four times in history. This rally is characterized by a stable implied volatility in the S&P 500 and Nasdaq-100, with the VIX remaining relatively unchanged since dropping below 18 in mid-April, even as the S&P 500 has increased by 7%.
This situation arises from aggressive call-buying in high-performing stocks and broad-market hedging by traders who view the VIX as a relative value compared to the implied volatility in sectors like technology and semiconductors.
According to an analysis by Goldman Sachs & Co., the correlation between the Nasdaq 100 index and the price of its 1-month call option has turned positive for only the fourth time in the last decade, indicating a potential for further gains.
Historically, when this correlation has been positive, the average return over the following month has been 2.7%, surpassing the average return of 1.5% during the studied period. Brian Garrett from Goldman Sachs noted that despite some market participants suggesting a potential unwind, the data does not support this view.
The current correlation level of around 0.4 is the highest since January 2017, a year marked by low volatility and significant stock market gains, with the S&P 500 rising 20% and the Nasdaq increasing nearly 32%.
However, it is important to note that the subsequent quarter in 2018 saw a dramatic spike in volatility, known as "Volmageddon," when the VIX surged to 50, leading to significant losses for short-volatility ETFs. This context suggests that while the current market dynamics may indicate further bullish action, caution is warranted given the historical precedents