Goldman Sachs says Wall Street's fear gauge is flashing a warning sign unseen since the dot-com crash in 2000

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  • Goldman Sachs said Wall Street's most popular fear gauge is flashing a warning sign not seen since the bursting of the dot-com bubble in 2000.
  • Normally, when the stock market rises, volatility tends to subside. But Goldman said this pattern has been upended, as both the S&P 500 and the VIX index have currently hit record peaks in correlation to each other.
  • Strong volatility in tech stocks and investor concerns over the US election results are key factors pushing the volatility index higher, analysts wrote in a note dated September 3.
  • "US equity markets have shown a strong 'vol up, spot up' pattern driven by single stock markets but influencing the VIX," they said.
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Goldman Sachs said Wall Street's top fear gauge is flashing a warning signal not seen in about two decades since the dot-com bubble burst in early 2000.

The CBOE Volatility Index, also known as the VIX, is the market's best indicator of expected volatility in the next 30 days. When the stock market rises, ordinarily the index declines, and vice versa.

A market that is steadily rising or falling has low volatility, but one in which rapid rises and falls follow in quick succession shows high volatility.
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A reading below 20% for the VIX means that the market is operating in a low-risk environment, while above 20 shows fear is picking up. A reading above 30 reflects heightened volatility.

Goldman said this trend has been upended as both the benchmark S&P 500 and VIX index have been moving in tandem.

Read more: Bank of America lays out the under-the-radar indicators showing that huge swaths of the stock market are 'running on fumes' — and warns a September meltdown may just be getting started
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This means that since the dot-com crash, the volatility index is at the highest it has been at a time when the S&P 500 is also at a peak since March 2000.

"US equity markets have shown a strong 'vol up, spot up' pattern driven by single stock markets but influencing the VIX," Goldman analysts Rocky Fishman, John Marshall, and Rohith Medarametla wrote in a September 3 note, when the VIX stood at 26.6. Another factor influencing the VIX is the concern that it may take longer than usual to arrive at a final election result in November.
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The S&P 500 is up about 17% while the VIX index has roughly doubled in value year-on-year. The VIX index was last at 32.16, compared with 34 for November VIX futures.

Read more: GOLDMAN SACHS: Buy these 19 stocks right now for big future gains once a COVID-19 vaccine is available

"What is particularly unusual this time is that realized volatility on the index has remained low (in part because of negative growth-value correlation), with 1-month realized vol at just 11%, so the increase in volatility is coming in the form of elevated vol risk premium," they said.
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The volatility risk premium is a representation of the compensation that investors earn for providing protection at a time when realised market volatility spikes unexpectedly.

The last time that the S&P 500 and the VIX were headed in the same direction in this way was when the dot-com bubble popped in March 2000, and the tech-heavy Nasdaq plunged about 80% from its peak to reach a trough at a six-year low in October 2002.

S&P 500 VIX futures rose 2.5% to 30.73 on Tuesday.
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