FX Evolution: In 40 Years This Has Only Happened 4 Times
Monday’s market meltdown resulted in an unusual event that’s happened just a handful of times. On average, just once a decade. The event? A surge in the volatility index, or VIX, up to one of its highest spikes ever.
With a read of 65 in pre-market trading on Monday, the VIX had its third-highest reading. Only the closing of the economy during COVID-19 and the housing crisis had higher readings.
Typically, the VIX trades in a range around 17-20. Sometimes, the VIX gets too low, usually under 15 but as low as 12. When that happens, markets are overly complacent. And there’s the heightened risk of a pullback following an unexpected event.
Usually, when the VIX pops higher to 20, the market tends to calm down. This time, however, markets blew past 20 and to 65.
What happened? It’s likely that traders looking to deleverage and hedge their bets simply overshot the market. The heightened fear led to soaring volatility. And since it happened pre-market, it took less volume to move the market.
For now, it’s clear that traders are looking to deleverage. And that there may be further market downside over the coming weeks. But the worst of the slump may be over for the time being. Markets should see less volatile daily swings.