The normally stable bond market has been volatile for much of this year and last year. That could give you a clue as to where the stock price is heading.
Many investors are already familiar with the Cboe Volatility Index (colloquially referred to as the VIX). It measures implicit volatility and is also known as the market fear index. When Wall Street is worried, inflation spikes. Recent examples include mutual attacks between Israel and Iran and concerns that inflation will be difficult to control.
VIX spikes are often accompanied by VIX declines.
S&P500
and other market benchmarks.
But Joseph Kalish, chief global macro strategist at Ned Davis Research, argues that investors relying solely on the VIX are missing another useful indicator. Bond temperatures often indicate fair or stormy weather for stocks as well.
On the fixed income side, the equivalent of VIX is the Merrill Option Volatility Estimation (MOVE) index. Kalish said that in recent years, the MOVE index has been highly correlated with indexes that track bond volatility. This effect is similar to that of the stock’s VIX.
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“Higher-than-trend bond volatility is bullish for Treasuries, while lower volatility is bearish for Treasuries,” he said. Ta. Lower volatility is a positive for riskier high-yield bonds. Typically, that part of the market outperforms when volatility is falling and underperforms when it is rising.
Kalish argues that equity investors should also pay attention to bond volatility, as it is often a strong indicator for stocks. “When the bond market moves and volatility falls relative to the two-year average, stocks are favored. Conversely, when bond volatility spikes, stocks struggle. Fixed income volatility has increased recently. The index is now way out of the most bullish zone for stocks.”
This is in line with the company’s VIX index, which issued a sell signal earlier this week, he noted.
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One reason the MOVE index doesn’t have the same cachet as the VIX is because stocks are typically much more volatile than bonds. But the gap has narrowed in recent months, and by the end of last year equity volatility was even lower than bond volatility, Kalish said.
That said, bond volatility has receded somewhat compared to last fall’s huge rally. “As a result, equity investors may want to pay more attention to bond volatility than equity volatility, as further declines in bond volatility could support further stock price appreciation.” he concluded.
During a year in which bonds are the talk of the world, stock investors stand to gain at least some profit from the turmoil.
Email Teresa Rivas at teresa.rivas@barrons.com.
