Traders Optimistic Volatility in U.S. stocks Will Shrink Further

Trading in U.S. stocks has recently been strong thanks to a number of factors that have supported higher gains.

Among other things, the strong performance owes a lot to the U.S. Federal Reserve’s dovish outlook, a thawing in relations between the U.S. and China after heightened trade wars, and corporate earnings results that surpassed expectations.

The S&P 500 saw soaring records last week following last year’s plunge of almost 20%. The Nasdaq similarly traded higher compared to last quarter. The Dow Jones Industrial Average, on the other hand,  is relatively lower compared to its previous high recorded in October 2018.

According to the VIX, which uses options pricing to gauge projected U.S. stocks volatility, the index for the next one month has dropped to 11.03. This is, incidentally, its lowest level in 2019, last being at this reading in August 2018.

Friday’s recording of 12.73 means the VIX remained well below its 36+ levels last observed in December when the U.S. market sell-off was at its peak.

Traders can expect stable trading in days to come after the U.S Commodity Futures Commission (CFTC) data portrayed VIX future net speculative positioning to have fallen to the least level in a period of 10 years.

According to Morgan Stanley, investors could be in for even lower volatility rates, although it is already at the extreme low. But the firm thinks the high anticipation could be an indicator of heightened levels of complacency within the investor community.

A number of indicators point to the likelihood of complacency, including the firm’s Global Risk Demand Index (GRDI) levels of close to +2 standard deviations.

These factors are also playing into the effect of tailwinds emanating from the U.S. Fed and evident softening of hardliner stances in the U.S./China trade talks.

Higher corporate earnings, as well as an improved Chinese economy,  have all played a role in the rebounding stocks and low volatility.

However, it is likely the seemingly stable markets will expose stocks to higher risks in case of unforeseen shocks in economic and monetary policies.