The stock market has been on a tear recently. The three major U.S. indexes all closed at record highs three trading days in a row, before falling just short of a fourth day on Wednesday.
The Nasdaq Composite COMP closed higher on Wednesday, its fourth record close in a row. Meanwhile, the Dow Jones Industrial Average DJIA fell 74.37 points and the S&P 500 SPX edged 0.30 points lower, pressing pause on their record runs. The three indexes were all positive during midday trading, but they were sent lower when Federal Reserve Chair Jerome Powell gave his afternoon news briefing.
But even as the three indexes all notched new intraday highs on Wednesday, signs were showing that traders expected a bumpy road ahead. The Cboe Volatility Index VIX, often referred to as Wall Street’s “fear gauge,” moved 3% higher soon after Wednesday’s opening bell.
The VIX measures the expected volatility in the S&P 500 over the coming 30 days. It does so by looking at the premiums that traders are willing to pay for call options and put options. So, a higher VIX means traders expect higher volatility in the near term.
Wednesday’s Fed meeting added context for the bump in the VIX. Stocks tend to be volatile on days the Fed holds its FOMC press conference, so a rising VIX could point to investors preparing for those swings.
The VIX also jumped during Powell’s speech on Wednesday, up over 5% at one point.
Beyond the Fed, the rising VIX may also have to do with the highly anticipated tech earnings from several “Magnificent Seven” companies late Wednesday and Thursday.
“Five out of the seven ‘Mag 7’ names release earnings this week, and markets may be preparing for some volatility following those results. Given how narrow the rally has been of late and how much the Mag 7 contribute to the S&P 500 market cap (around 35%), that’s probably a prudent move,” Joe Mazzola, head trading and derivatives strategist at Schwab, told MarketWatch.
Typically, the VIX moves in the opposite direction of the stock market, and it’s somewhat unusual for the VIX to move higher on the same day the S&P 500 ends at a record.
The S&P 500 has closed at a new record high 871 times since 1990, according to Dow Jones Market Data. Of those 871 times, the VIX has ended the same day higher 281 times, which is about 32.3%.