There's No Bubble in Equities But There's One in VIX, Says JP Morgan's Top Strategist Kolanovic

February 24, 2021 8:35 AM EST

Get inside Wall Street with StreetInsider Premium. Claim your 1-week free trial here.

Marko Kolanovic, the Global Head of Macro Quantitative and Derivatives Strategy team at JP Morgan, expects the S&P 500 to continue marching higher as VIX settles around 20.00.

Kolanovic and his team of strategists don’t believe equities are trading in a bubble. However, certain stocks in sectors such as electric vehicles (EV), renewable energy, and innovations - may generate a bubble.

“The current market turmoil is a result of pro-risk sector and style rotations, away from speculative growth and bond proxies, and inflows into value and cyclicals. In fact, this strong rotation resulted in market moves grinding to a halt, and 2-week realized volatility of the S&P 500 dropped to ~5%, levels that were last seen in 2017,” Kolanovic wrote in today’s note sent to clients.

“While there is a lot of talk about bubbles – it is hard to see one in the broad equity market, where a dominant group (FANGs) practically hasn’t moved for 6 months despite massive amount of stimulus and an expected economic recovery, Financials that have barely recovered 2020 losses, and Energy that is still down 25% from last year despite a commodity bull market.”

He stresses that Cboe’s volatility index seems “disconnected to underlying short term S&P 500 realized volatility,” which is showing a bubble of fear and demand from investors looking to hedge or profit from a potential market selloff.

In laymen’s terms, VIX is currently trading in a bubble. Therefore, with VIX trading at a near-record premium to actual equity volatility, Kolanovic sees a case for selling the “VIX bubble”.

“Reiterating the reasons why we think the VIX is bound to decline: 1) Positive macro fundamentals of monetary and fiscal stimulus, as well as recovery from pandemic; 2) Strong rotation from growth to value/cyclicals that is keeping correlation between stocks low. In fact, in the last 2 weeks, despite large moves in sectors and factors, the S&P 500 has remained largely unchanged;

“3) Low volatility drives inflows, triggering a positive feedback loop of a rising market and declining volatility – despite some warning of a ‘var shock’ what we are seeing now is ‘var inflows’ with volatility targeters/risk parity funds adding (rather than reducing) ~$1.5bn in equity exposure daily; 4) Gamma hedging reducing S&P 500 volatility, and long VIX positioning (e.g. via ETPs, see here) limiting VIX upside,” Kolanovic adds.



Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

Analyst Comments, Hot Comments, Trader Talk

Related Entities

JPMorgan, Standard & Poor's