Short-Term Volatility Assessment: November, 24th 2024

Overview

As of November 2024, the CBOE Volatility Index (VIX) sits at 15.24, reflecting subdued market anxiety. However, recent developments—such as sector rotation, geopolitical risks, and shifting central bank policies—suggest a nuanced outlook. Using our historical-based framework and a structured probability model, here is the most likely scenario for short-term volatility.

Assessment by Framework Indicators

1. Geopolitical Environment

• Key Drivers:

  • Escalation in Ukraine with Russia deploying hypersonic missiles raises risks to energy infrastructure.

  • Rising geopolitical uncertainty, including espionage activities and EU enlargement challenges.

• Impact: While partially priced in, unexpected developments could amplify volatility.

2. Global Economic Environment

• Key Drivers:

  • Strong U.S. consumer spending contrasts with weakening eurozone growth.

  • Persistent economic disparities may increase global market tensions.

• Impact: No immediate macroeconomic shocks, but continued vigilance is necessary.

3. Central Bank Policies

• Key Drivers:

  • The Federal Reserve’s rate cuts signal dovish support for growth.

  • Bank of Japan's normalization introduces new dynamics after prolonged easing.

• Impact: Policies are largely anticipated, with limited potential for unexpected volatility.

4. U.S. Corporate Earnings Results

• Key Drivers:

  • Positive earnings from technology and consumer goods sectors reduce immediate fears.

• Impact: Earnings stability supports continued confidence.

5. Stock Market Performance

• Key Drivers:

  • Strong index gains, particularly in Russell 2000 and Dow Jones, suggest sector rotation into value and small caps.

  • NASDAQ and S&P 500 exhibit relative underperformance, signaling caution in growth sectors.

• Impact: Rotation reflects defensiveness, aligning with pre-crash patterns seen historically.

6. Stock Market Volatility

• Key Drivers:

  • The VIX remains below historical averages, signaling short-term complacency.

• Impact: Current conditions favor stability unless triggered by exogenous shocks.

7. Seasonality

• Key Drivers:

  • Thanksgiving rally and year-end optimism provide a buffer to volatility.

• Impact: Seasonal factors help mitigate downside risks.

Short-Term VIX Outlook

Base Case (Moderate Increase):

• VIX Range: 16–18

• Probability: ~70%

• Scenario:

  • Sector rotation signals caution but remains within manageable bounds.

  • Geopolitical risks and economic dynamics drive modest volatility increases.

Key Risks and Opportunities

1. Monitor Triggers:

   • Geopolitical developments, particularly in Ukraine, and unexpected central bank moves.

2. Sector Behavior:

   • Continued rotation into value and defensives may signal rising caution among investors.

3. Actionable Steps:

   • Use this period to hedge against moderate volatility and align portfolios with sector rotation signals.

Summary

The most likely scenario for the VIX is a moderate increase toward 16–18 over the next 7–14 days. Historical patterns, coupled with sector rotation and geopolitical uncertainty, support this outlook. Investors should remain cautious while leveraging defensive strategies to navigate potential volatility.