By Investing.com — The CBOE Volatility Index, or VIX, often referred to as the “fear gauge,” is showing signs of another potential spike in market volatility, according to the latest Sevens Report.
After surging above 60 in early August, the VIX has since fallen sharply and currently sits around 15.
Despite this decline, Sevens cautions that ignoring the VIX could be a mistake as the index is now trending higher, forming a series of higher lows, which hasn’t been seen since late 2021, a period that led to significant market turmoil.
In addition to the upward trend, Sevens Research highlights the unusual term structure of VIX futures. “The VIX futures curve is in backwardation,” the analysts explain, meaning the October contract is trading at a premium to the November contract.
This is a rare development and suggests derivatives traders are positioning for a significant increase in volatility in the coming weeks, according to Sevens.
They explain that typically, longer-duration contracts trade at a premium to shorter-duration ones due to the increased risk over time.
However, the inversion seen here implies that traders expect a spike in volatility before the October contract expires on October 16th.
The report advises watching for three key developments: a rise in the VIX index above the 24 level, a normalization of the VIX futures curve (which would be bullish for stocks), or a widening premium between the October and November contracts.
If the latter occurs, it “would indicate rising risks of a selloff that could send the S&P 500 back to the early September, or even early August lows,” concluded Sevens.