Market turbulence has calmed down since the mid-March extremes, but a couple of recent moves may bode particularly well for stocks.
The Cboe Volatility Index, or VIX, closed below its second-month future on Monday for the first time since Feb. 21, going back to a more typical structure.
Since contracts dated further out would tend to carry more uncertainty than those closer in, they would normally trade higher -- though that hadn’t been the case in recent weeks because of the massive concern caused by the spread of COVID-19 and ramifications for public health, economies and financial markets.
Similarly, the S&P 500 Index’s three-month call implied volatility went above its 30-day volatility on Friday, a phenomenon that bodes well for equities in the medium term, Susquehanna Financial Group LLLP noted.
“Since 1990 there have been 11 times SPX term structure (90-day/30-day) closed over 1.0x for the first time in 30 days,” Susquehanna derivatives strategist Chris Murphy wrote in a note Monday. “The index is relatively flat for the first two weeks afterward and finishes one month later up on average 85 basis points.”
Once volatility reverts to upward-sloping after spending at least a month inverted, small-cap stocks tend to outperform in the following month, Murphy said. He recommends that investors who expect smaller companies to shine in the next few weeks buy May $133/$138 call-option spreads on the iShares Russell 2000 exchange-traded fund.
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