BofA-ML sees signs volatility bubble in stocks deflating
Analysts at Bank of America-Merrill Lynch are hailing what they term a "healthier" US stockmarket, arguing that it is leading the deflation of the low volatility 'bubble'.
Hence the fact that the Chicago Board of Trade's VIX index was trading almost a quarter above its 2017 lows even as the S&P 500 neared its all-time highs again.
That, they argued, showed that Wall Street was weaning itself off of its dependency on the US central bank and starting to trade "more on fundamentals than on technicals".
"Moreover, rising volatility is not the only indication of a healthier risk psychology returning to US equities. Indeed, the average S&P down day in 2018 is 20% larger than the average up day vs. 17% smaller in 2017, despite a surge in share buybacks this year," they said.
"Hence, with equity volatility typically supported in the late stages of a bull market and the shift from QE to QT likely to gain momentum globally, we think it's a question of "when" rather than "if" stress in other asset classes begins to normalize as well.
"During the transition, which history suggests can be a slower process than many may appreciate, we continue to like leaning long volatility with minimal carry by owning longer-dated SPX forward variance and advise risk premia investors to adopt a diversified cross-asset approach to harvesting the volatility risk premium."