Apparent calm in the stock market masks heightened expectations for big stock market gyrations over the next three months, Goldman strategists said in a note on Friday.
One indication of how anxious investors are is the fact that the 3-month downside implied volatility skew, which compares put option prices with at-the-money option prices, has reached new all-time highs, the note said.
“High skew reflects investors’ perception that high volatility would return should markets sell off,” the strategists said.
The elevated level of skew reflects views that stocks would become increasingly correlated in such a scenario, the strategists said.
The strategists expect markets’ sensitivity to economic data to increase with time, and recommended longer-dated hedges rather than ones with a shorter tenor.
The S&P 500 Index ended the week at record high on Friday, lifted by Nike and several banks, while weaker-than-expected inflation data eased worries about a sudden tapering in stimulus by the Federal Reserve.
The Cboe Volatility Index – often called Wall Street’s fear gauge – finished down 2.2 points at 15.62, not far from the more than 16-month low of 14.19 touched on Thursday.