There’s a record disconnect between rising stocks and skittish volatility markets

The raucous recovery in US stock markets has yet to be validated by volatility markets.

In fact, the signals being sent between these two asset classes have never conflicted for as long as they have recently.

The S&P 500 has gained for seven straight sessions, its longest streak since September. Meanwhile, the front of the VIX futures curve has remained inverted — that is, the front-month future has been trading above the second-month future.

The front of the VIX futures curve has been in that term structure for the past 23 sessions, suggesting (loosely) that the S&P 500 is expected to be more volatile over the coming month than the month after that. VIX futures are tied to the VIX Index, which tracks the 30-day implied volatility of the S&P 500 using out-of-the-money options prices.

Typically, the VIX futures curve slopes upward. That’s because markets are usually going up, and the time that we should be concerned about stocks falling is at some undetermined time in the future.

An inverted VIX curve is a signal that the time for worry is now. Stocks going up are, in part, a signal that the worst of the momentum breakdown and tariff-enhanced recession fears are in the rearview mirror. In other words, the volatility markets are telling traders to stay on guard while the price action in the stock market is suggesting that worry is steadily melting away.

The seven consecutive sessions of the S&P 500 rising while the front of the VIX curve stays inverted is the longest such streak on record going back to the introduction of VIX futures in 2004.

“Some like to anthropomorphize the VIX by referring to it as the fear index, but what it really captures is the current health of the market,” said Dave Roberts, an independent trader of volatility and vol products. “Despite a lot of recent stock gains, the inverted curve is still signaling we are in a bear market environment where stocks are susceptible to sharp drops.”

The next-longest streak of this nature came in February 2018, after the blowup of two exchange-traded products that allowed traders to bet on market calm had a scarring effect on volatility markets that outlived the impact on the stock market.

Of course, volatility is, in theory, direction agnostic. A high VIX means stocks are being priced to move a lot — up or down. But in practice, pricing high implied volatility along with an inverted VIX curve has tended to coincide with markets going down, not up.

Hence why this combination, for this long, has never happened before!