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VIX likely to continue trending higher after reaching two-month high

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VIX reaches two-month high, but there could be plenty left in the tank as rates rise and recessionary pressures build

MDE-3443_Volatility_MY-IG_Banner-genericSource: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Friday 23 September 2022 

VIX rises to two-month high

The VIX has enjoyed a period of strength over the course of the past six-weeks, with price rising into the 29 level for the first time in two-months. That past fortnight has seen the focus shift back towards the central banks, with the likes of the ECB, BoC, RBA, FOMC, and SNB all raising rates. Unfortunately, the outlook from an economic standpoint remains bleak, with countries essentially seeking to drive down consumption with a view to weakening inflation. The long-term picture may provide some hope, yet the uncertain length of time involved does provide the basis for near-term weakness in stocks. The VIX typically has a strong negative correlation with the S&P 500, with the chart below highlighting how that correlation coefficient is heading back down in the direction of the perfect negative coefficient figure of -1.

VIXSNP230922.pngSource: TradingView

Looking at the VIX from a historical perspective, we can see that the 2008 crisis brought a sharp rise into the 60 mark. That is over double the current price level. Meanwhile, the Covid crisis saw the VIX top out around 53. With the current crisis representing a rare recession that comes alongside a dramatic period of monetary tightening, there is a significant chance that we have plenty of upside left in the tank for the VIX.

LTVIX230922.PNGSource: TradingView

Taking a look at the VIX from a shorter-term perspective, we can see a nice bullish theme building here. The four-hour chart highlights the rise into a two-month high over the course of the past fortnight, with regular deep pullbacks taking shape along the way (61.8-76.4%). With price having broken through the 28.64 resistance level, we are on the way to the next peak. Perhaps it makes sense to await another pullback for an entry. Either way, it looks likely that we will see further upside take shape for the VIX as rates rise and recessionary pressures build as a result.

VIX-4-hours-2022_09_23-14h46.pngSource: ProRealTime
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