Investors have been basking in the sunlight of a year-end market rally in 2023 that appears to be continuing in 2024 after a slow start to January. However, a Fed that’s keeping rates steady amid hotter-than-expected inflation is allowing volatility to spike, but offers a potential inverse ETF play for traders.
The prime volatility indicator, the Cboe Volatility Index, or simply the VIX, is up over 25% for the year. The VIX has seen momentary spikes so far in 2024, as interest rate cuts that investors were hoping for in 2024 continue to be pushed back.
In the meantime, the Direxion Daily S&P 500 Bull 3X Shares ETF (SPXL) is still up about 12% for the year, but when volatility spikes, it could offer traders the opportunity to take the other side. As volatility returns to the markets, Wall Street traders may be exiting short positions on the VIX. In turn, this could spell bad news for the S&P 500. It also harkens back to 2018, when volatility reached voluminous levels.
“A popular trade that triggered a historic market meltdown back in 2018 made a comeback last year, as one barometer of its performance logged its best year in six,” a MarketWatch report said, noting that an unwinding of bets on less volatility could trigger a sell-off, thereby crushing the current rally.
“But as with any successful trade on Wall Street, some derivatives-market experts now fear that shorting volatility, or being ‘short vol,’ has become overcrowded, increasing the risk that a sudden spike in the Cboe Volatility Index VIX, or the VIX, could spark a selloff that might send the S&P 500 tumbling,” the report added.
