Wall Street hotly debates: "Overvalued" VIX, a mistaken "buy signal"?

This week, the global financial markets experienced a "roller-coaster" style of significant volatility. On Monday, the VIX volatility index, known as the "Wall Street Fear Index," surged to over 65, marking the fourth highest level in history, following only the 1998 financial crisis, the 2008 financial crisis, and the 2020 pandemic outbreak.

However, as global markets saw a rebound, Wall Street began to question the accuracy of this "fear index."

Reasons for the VIX Surge

After the surge in the VIX index on Monday, experts measuring volatility stated that the sharp fluctuations in the index may have been caused by several technical factors, including a significant lack of liquidity, short covering from those who bet on volatility incorrectly, or simply the way volatility is calculated.

Former U.S. Treasury Secretary Summers stated on a TV show on Friday:

"My understanding is that there is some artificiality to the VIX's movement on Monday due to the use of some illiquid instruments in its calculation."

Disconnection between VIX and Futures

On Monday, the VIX soared to over 65, but at the same time, VIX futures had a smaller increase. Derivatives experts believe that VIX futures better reflect actual fund flows and may more accurately gauge market sentiment.

Rocky Fishman, founder of derivatives analysis company Asym 500, said:

"Actual trades matter more than market quotes. In situations of significant market volatility outside of regular trading hours, investors may find that near-term VIX futures are better at measuring hedging demand than the VIX itself."

Overestimated VIX, Incorrect "Buy Signal"?

As an important indicator that has existed for over thirty years and has witnessed financial crises, "volatility doomsdays," and many other financial risk events, the VIX index is a key input for many Wall Street models predicting stock market trends.

Sudden surges like the one on Monday are usually seen as a signal of investor capitulation, potentially laying the foundation for a rebound. Indeed, the S&P 500 index rose for three consecutive trading days after this, with investors continuing to pour significant funds into stock exchange-traded funds (ETFs).

Regarding whether the surging VIX should be seen as a "buy signal," Peter Tchir, Head of Macro Strategy at Academy Securities, stated that viewing a VIX breakout above 65 as a buying opportunity is a mistake. In a report, he wrote:

"So many people finding comfort in the 'fact' that 'we had a surge in volatility, and now it's over,' makes me very nervous."