Stock market's fear gauge VIX spikes 70% in 9 sessions; experts see more rise

Equity benchmark indices Sensex and Nifty witnessed a volatile trade on Tuesday, as concerns about the outcome of the Lok Sabha elections results took centre stage, in the absence of any major trigger on the domestic or global front.  The BSE Sensex and NSE Nifty plunged nearly 1% (from the day’s high) after a positive start today amid a sell-off in realty and healthcare stocks, while mixed Q4 earnings and a spike in India VIX, also known as the fear index, further soured investors’ appetite for riskier assets. VIX is an volatility index calculated by the exchange to measure the market's anticipation for volatility and fluctuations in the near term.

India VIX maintained an uptrend for the eighth consecutive session today, with the volatility index soaring over 6% intraday to touch a fresh 52-week high level of 17.64. Since the fall of nearly 20% on April 23, 2024, the fear indicator index has risen nearly 70% in the last 9 trading sessions.

In the last month, India VIX has risen 45%, while it surged 51% in six months and 34% in the past 12 months. On year-to-date (YTD), the volatility index has seen some consolidation, up 15% during this period, thanks to the pre-election rally in the equity market in March and April.

Anand James, Chief Market Strategist, Geojit Financial Services, says, "Seen in isolation, the present levels of VIX are consistent with historical trends, which usually witness a rise in VIX when previous peaks are re-visited. In early April 2024, when Nifty tested a new record peak, VIX was near 11, but now above 16, when we are again back in the vicinity of the record peak.”

“What is raising eyebrows now is the steepness in the fall and rise of VIX in a small time frame. Just three weeks back, VIX had fallen to near record lows, after Nifty averted a major fall, having bounced off the previous month’s low, thus calming investors,” James adds.

Echoing the same, Santosh Meena, Head of Research, Swastika Investmart, says the rise in the VIX, a volatility gauge often nicknamed the fear index, aligns with historical trends, as it typically climbs before major events like general elections. “In 2019, it saw a 150% jump (from 12 to 30), and in 2014, it spiked 212% (from 12.5 to 39).”

According to Ashwin Ramani, Derivatives Analyst, SAMCO Securities, the VIX has been taking multiple resistance around the 16.5 levels since the start of 2024. It broke the level on Monday and moved even higher Tuesday (today) and has made a new 52-week high of 17.55 as of 12 noon today.

“The rise in volatility gives discomfort to the bulls,” says Ramani, adding that despite the sharp rise in the VIX, Nifty is down only 2% from its all-time high of 22,795 made on May 3, 2024.

Neeraj Chadawar, Head - Fundamental and Quantitative Research, Axis Securities, says that the index has spiked by 40-45% in the last week indicating some amount of risk-off in the market. However, this reading is still below the long-term average of 22. “In that regard, one should watch the direction of the index in upcoming trading sessions,” he adds.

Reason for spike in VIX index

Santosh Meena of Swastika Investmart says that there are two key factors driving the VIX's rise. First, portfolio investors are buying protective put options to hedge their holdings. Second, traders are speculating on significant price movements post-election by purchasing both calls and put options.

Ashwin Ramani of SAMCO Securities opines that a rise in the VIX indicates expectations of increased volatility ahead. He said that the fear indicator usually has an inverse correlation with Nifty. Meaning, the higher the VIX, the greater the level of fear and uncertainty and the market falls due to the increased fear. If the VIX goes down, the volatility cools down, premiums in the derivatives segment become cheaper, and at some point, the greed sets in and the market rises.

According to Anand James, Chief Market Strategist, Geojit Financial Services, while a lot can be explained in terms of historical trends, the approach of record peaks, upcoming election results, and even the liquidity impact on lot size reduction in Nifty, the recent swings are difficult to be fully attributed to. “Perhaps the right way to approach this is to acknowledge that while VIX and Nifty are positively correlated, more so in a large time frame, the strength of the correlation is low, especially in the short term.”

What lies ahead?

Analyst at Swastika Investmart believes that a further increase in the VIX is likely, with a potential move towards 25 before the election results. For Nifty, crucial support levels to watch include 22,300, 22,000, and 21,700. “For an upward trend to be established, a breakout above 22,800 is necessary.”

Meanwhile, analyst at SAMCO Securities says that Nifty has a channel support around the 22,200 levels on the daily chart. “A break down below the same with the volatility rising even further can lead to Nifty moving south until 21,800 levels where its support is placed. It is advisable to be conservative while initiating a long position till the settles down.”

While the market strategist at Geojit says that the VIX needs to sustain above 16 to elucidate higher fluctuations in option premiums.

Chadawar of Axis Securities believes the market fundamentals will be driven by “narrative” in the near term, especially in the absence of any major trigger. “The market will continue to find direction based on macroeconomic developments, the direction of bond yields, oil prices & dollar index, the ongoing corporate earnings season, and the ongoing election cues. In light of these developments, we believe style and sector rotation will play a critical role in the alpha generation, moving ahead.”

“Keeping this in view, the broader market may see some time correction in certain pockets in the near term and flows will likely shift to large caps. Based on this, we believe Nifty 50 could see a new high in the near term,” he adds.

Chadawar recommends investors to remain invested in the market and maintain good liquidity (10%) to use any dips in a phased manner and build a position in high-quality companies (where the earnings visibility is quite high) with an investment horizon of 12-18 months.

Shrey Jain, Founder and CEO SAS Online, advises traders to be careful amid the ongoing Lok Sabha Elections 2024. “Typically, if the election unfolds as anticipated, the market stabilises. However, if there's an unexpected twist, things could become unpredictable quickly. In such cases, investors should be cautious and consider adjusting their investments to reduce risk.”

Jain adds that one strategy is to decrease stock holdings and increase allocations to safer options like bonds or stable investments.

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