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The Cboe Volatility Index — or VIX — has dropped 16 points since late October to about 24, as expectations for market gyrations ebbed following the U.S. election and news of a promising coronavirus vaccine. The VIX remains above its lifetime 19.5 average amid risks such as the still-escalating pandemic and U.S. transition to power.
Still, the VIX looks ready to go below 20, which “would be a major risk-on signal,” Tom Lee, co-founder of Fundstrat Global Advisors LLC, wrote in a note Wednesday, adding the move may also lead to “risk-on investment leverage.”
The slide in the VIX could even set up a scenario where volatility-focused funds buy stocks, potentially fueling gains. At the same time, some analysts have cautioned that the recent rally has gone too far.
Morgan Stanley (NYSE:MS) strategists led by Phanikiran Naraparaju remain comparatively sanguine, writing in a note Thursday that “we expect realized volatility to resume the grind lower, typical of this stage in ‘early-cycle’ environments.” They recommend selling volatility to position for the cyclical decline.
©2020 Bloomberg L.P.
