Futures close to ‘fear gauge’ indicating an uptick in US stock selling

Futures close to ‘fear gauge’ indicating an uptick in US stock selling

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Futures contracts linked to the Wall Street fear gauge are close to sending a signal of the growing fear that has at times preceded a stock market rebound in the past.

With investors waiting for the Federal Reserve’s announcement on Wednesday afternoon, October futures were only 0.20 points less traded than November futures, the lowest margin since mid-June, when it marked the bottom.

VIX futures, which chart volatility expectations for several months to come, typically remain sloping upward, with near-term futures prices relatively lower than those targeting the coming months.

The inverted curve, when semi-dated contracts are more expensive than later-dated contracts, indicates that investors are becoming increasingly concerned about near-term events, which raises the cost of hedging.

This signal has appeared notably five times since 2020, with two cases followed by market rebounds, including the most recent in mid-June.

Chart: Futures Volatility https://graphics.reuters.com/USA-STOCKS/akpezbkxjvr/chart.png

“It’s usually a sign that all risk is being pulled into the here and now,” said Chris Murphy, co-head of derivative strategy at Susquehanna Group International.

“That’s why we’ll often look at it as a sign of surrender,” Murphy said.

The two closest VIX futures contracts were flipped in June, amid a bout of selling that pushed the S&P 500 index to bear market lows. The index hit 17% soon after, although most of that rally was reversed due to concerns that the Fed would be more hawkish than previously expected.

While a reversal this time may signal an increase in selling pressure, it doesn’t necessarily signal an immediate end to the market’s recent slump, Murphy said. For example, the two-month VIX futures contract held upside down for a month β€” from mid-February through mid-March β€” before the first-quarter stock market sell-off took a breather.

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To be sure, a lot of the upside in expectations of near-term volatility now creating a reversal could come from the looming Fed decision, and could pull back once the decision is out of the way, strategists said.

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