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The VIX Has Fallen 11.1% in a Week. So Where Is the Stock Market Rally?

Simon Mugo trader
Updated 7 Jul 2022

Trade VIX CFDs Here Your capital is at risk

Key points:

  • The VIX has fallen 11.1% in a week, but the stock market has barely moved.
  • In the past, a flailing VIX was associated with rising stock markets.
  • So what exactly is going on this time? Read on to find out.

The VIX (INDEXCBOE: VIX) has fallen 11.1% in the past five trading days and is currently trading near its recent low of 24, which has acted as support in the past, triggering a rally in the US stock market indices such as the S&P 500.

However, the S&P 500 is up a mere 2.35% in the same period, indicating that the falling VIX has not resulted in a corresponding rally in US stocks. The first conclusion we can draw from this scenario is that, while stock market volatility is fading, investors are not keen to start deploying capital into the markets.

Also read: Five Best Shares For Beginners To Watch In 2022.

The lack of positive action in the US stock markets indicates that investors are more concerned by the macro factors weighing on stocks, especially the Federal Reserve’s hawkish stance that has seen most US stock indices apart from the Dow Jones fall into bear market territory.

Investors choose to hold on to their money until the macro situation changes. However, not everyone is holding on to their funds; we have hedge funds still trading in the current market conditions by shorting stocks they think could fall much further.

Therefore, it is safe to say that most investors led by institutions are holding back from buying until there is a clear path out of the current economic environment. However, the US economy’s future does not look promising, given the Fed’s determination to combat inflation via rate hikes.

Everyone is bracing for a recession, while the Federal Reserve Chairman, Jerome Powell, is preparing the economy for a soft landing, a scenario that now looks like a pipe dream.

Investors must remember that Powell kept denying that the inflation situation in the US was concerning last year when the Fed could have easily controlled the situation by starting rate hikes earlier and slowly withdrawing excessive liquidity from the market.

The Fed chair kept saying that the inflation witnessed in the US was ‘transitory’ in nature before finally acknowledging that the country was dealing with runaway inflation earlier this year. Right now, every expert is warning the Fed that the US economy is teetering on the verge of a recession, yet Powell remains adamant about another 75 basis point rate hike.

This will not end well for everyone, but a recession will kill off most of the zombie businesses fueled by the Fed’s money printing over the last two years and will also trim the crazy valuations that most assets are trading at. Therefore, investors should brace for worse if the Fed maintains its current hawkish stance.

*This is not investment advice. Always do your due diligence before making investment decisions.

VIX  Stock price.

VIX stock price 07-07-2022
Source: Tradingview

The VIX stock price has fallen 10.81% in a week, but where is the stock market rally?

Simon has over six years of professional trading experience across FX, commodities and equities. He has a strong passion for financial markets and is particularly focused on price action trading