A Sudden Jump in Volatility Spells Trouble for US Stocks

Stock market volatility is suddenly back on radar screens as equities drop for a third day in a row. That doesn’t bode well for the performance of markets, which haven’t seen a pullback of 5% or more since March.

The VIX Index is trading at 16.9 this morning, its highest level in two months, and bouncing from a low of 12.7 last week. While in absolute terms the level is still low compared to history, this week’s surprise spike might cause some of the market forces behind this year’s rally to switch direction.

“We have seen conditions finally within reach of dictating some mechanical selling or deleveraging risk,” Charlie McElligott, cross-Asset strategist at Nomura, said in a note to clients on Wednesday. He added that investors needed to start thinking about the potential risk for larger market moves knocking into volatility-sensitive systematic strategies.

Volatility Revival Brings Potential For More De-Risking