Is the continuous decline of the panic index indicative of the continuation of the bull market in US stocks?

Despite ongoing concerns about inflation and rising interest rates, the Chicago Board Options Exchange Volatility Index (VIX) continues to decline.

According to DataTrek Research, the so-called "fear index" on Wall Street has been in a state of "mysterious contraction" this year, which is a bullish signal for the stock market.

Fear Index Hits New Low Since the Pandemic

Nicholas Colas, co-founder of DataTrek, said, "For months, we have been saying that a low VIX is a sign of a bull market in the US stock market." "However, we still believe that the next few weeks will be turbulent."

Data from FactSet shows that the fear index has fallen more than 35% so far this year, below its long-term average. As of Monday, the S&P 500 index has risen 16% in 2023.

Colas' report shows that the VIX index hit a "post-pandemic low" last week, closing below 13 on September 14, which is "rare" for the index and a positive signal for the US stock market in the next three months. He said this indicates that the recent "volatility" will continue.

On Monday, the VIX index closed at 14, well below its long-term average of around 20. The index closed at 12.8 on September 14.

Some Bearish Factors in the Stock Market

In explaining the reasons why investors may feel fearful, Colas listed several concerning issues, including uncertainty surrounding inflation, recent surges in oil prices, and the "uncertain outlook" for how long the Federal Reserve will maintain high interest rates.

The recent rise in US bond yields has also put pressure on US stocks, with the 10-year Treasury yield expected to reach "a more than 10-year high," according to Colas.

According to Dow Jones Market Data, the 10-year Treasury yield closed at 4.318% on Monday. Data from FactSet shows that this is comparable to the level at the end of 2007.

Meanwhile, Colas stated that September and October are the "seasonal peaks of stock market volatility."

There are also concerns about zero-date options becoming increasingly popular in the stock market, as "you might think that the increase in zero-date options usage would push up expected volatility rather than lower it," Colas said.

"The ultra-low volatility index tells us that these concerns are not enough to offset the strong fundamentals of US companies and the confidence in the Federal Reserve's fundamental end to rate hikes," Colas said. "The US stock market is discounting the possibility of a recession in the next 1-2 years, regardless of what the historical yield curve inversion suggests at this point."