Wolfe Research warned in a note on Thursday that U.S. equities could face additional downward pressure, saying current readings of investor fear and market positioning have not hit the extremes typically seen at durable market troughs.
Analyst Chris Senyek at Wolfe Research pointed to past episodes of acute market stress - including Liberation Day, the Silicon Valley Bank episode and the early days of the COVID crisis - when the CBOE Volatility Index, or VIX, has tended to jump above 40. In those prior episodes, the spike above 40 corresponded with peak investor fear and marked a bottom in stocks, according to the firm.
During the recent selloff, the VIX only reached about 35 on an intraday basis on Monday, a level Wolfe views as short of the spike that has historically signaled maximum fear. "Our sense is that max fear has not yet been reached," the note states.
Wolfe added that several of the volatility and positioning indicators it monitors have not yet flagged full investor capitulation. Those gauges include the put/call ratio and measures of hedge fund crowding, which the firm says remain below the thresholds that have coincided with market bottoms in past stress events.
Seasonal tendencies usually see the VIX crest in March before easing into spring and summer, the analysts noted. This year, however, they described the backdrop as more fragile. Wolfe pointed to elevated volatility stemming from the conflict in Iran and mounting concerns about emerging strains in private credit as reasons to expect continued downside pressure on equities in the near term.
Given that assessment, the analysts said they would not be increasing risk exposure and expect stocks to "continue to bleed lower" until one of two developments occurs: the VIX pushes above 40 or news flow produces a meaningful de-escalation in the Middle East.
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