Jonathan Krinsky, MKM Parners’ chief market technician, pointed out that scenarios where small-caps plunge while large-caps remain unfazed are rare occurrences, writes Chris Dieterich for the Wall Street Journal.
Krinsky discovered only two instances in the past 20 years when the VIX touched a 52-week low while the Russell 2000 crossed below its 200-day moving average, and this Thursday marked the third time the same scenario played out. In prior instances – 2000 and 2004, the VIX jumped over the following three months.
“The bulls will argue that a low VIX shows there is nothing to fear, and therefore the market should continue to drift higher with limited volatility events,” Krinsky said. “The bears will argue this is a sign of complacency, and a reversion is likely. We tend to side with the latter, and at a minimum would be looking at hedging strategies.”
Traders seeking to hedge against volatility can take a look at the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), the largest volatility-based exchange traded note that tries to track the VIX index. VXX is down 17.2% year-to-date.
For more information on the CBOE volatility index, visit our VIX category.
Max Chen contributed to this article.