CBOE Volatility Index (VIX) Trends

The CBOE Volatility Index, or VIX, is often called the “fear gauge.” According to the latest Sevens Report, it’s showing signs of potential market volatility spikes.

After rising above 60 in early August, the VIX has dropped sharply and currently sits around 15. Despite this decline, Sevens warns that ignoring the VIX could be a mistake. The index is now trending higher, forming a series of higher lows not seen since late 2021, a period which led to considerable market turmoil.

In addition to the upward trend, Sevens Research points out an unusual term structure in VIX futures. The analysts state, “The VIX futures curve is in backwardation,” meaning the October contract is trading at a premium over the November contract.

This rare development suggests derivatives traders are preparing for significant volatility increases in the upcoming weeks. Typically, longer-duration contracts trade at premiums due to increased time risk, but the current inversion shows that traders expect a volatility spike before the October contract expires on October 16th.

The report recommends monitoring three key developments:
1. A rise in the VIX index above the 24 level.
2. Normalization of the VIX futures curve (which would be bullish for stocks).
3. A widening premium between October and November contracts.

If the latter happens, it would indicate increased risk of a selloff, potentially pushing the S&P 500 back to early September or even early August lows, as concluded by Sevens.