CBOE Volatility Index, the VIX Index is based on options of the S&P 500® Index, which is considered the leading indicator of the broad U.S. stock market. The VIX Index is recognized as the world’s premier gauge of U.S. equity market volatility; also known as the fear gauge of the market. On Friday, this index closed at 20.15 – this was from a high of 24.83 on Wednesday, but higher than the closed from the week before at 19.05. 

Crypto… the elephant in the room… 

I cannot count the number of times Bitcoin was mentioned on Bloomberg TV last week, so I will have to talk about it. 

From this Bloomberg article, Bitcoin fell as much as 10% to a low of $33,550 in late Friday, before rebounding to as high as $38,133. Ether was down about 38% over the past 7 sessions.  

These moves were attributed to tweets from Elon Musk and China government restrictions. Other concerning factors include taxes and the massive amount of power associated with crypto. 

At the end of the day, this volatility may not be good for crypto and possibly the broader market. 

As shared in my previous articles, inflation that leads to higher yields, the Fed talking about tapering with the VIX, and the above mentioned Crypto movement, would all affect risk appetite. 

And risk appetite will determine if we make new highs or trade lower in the stock market. 

Risk appetite will also determine if any selloff in crypto and the stock market will meet with buying on the dips. 

The US stock market traded sideways last week with some volatility. The selloff in Crypto and some of the large caps may have reduced some of the excess speculations that have been in the market for some time. The worry, of course, is the effect it will have on the broader market if speculators get burnt and large leveraged accounts experience large margin calls that cannot be met. 

The good news is, that it is always beneficial to weed out excess speculation in markets. 

The downside is, sometimes when this happens, it also kills risk appetite – and this may lead to excessive moves to the downside.  

We will have to see if the market is mature enough, and stable enough, to go through a cleansing of over speculation and focus on the fundamentals. 

With economies rebounding, loose money policies, and little alternative to invest your money, we are more likely to see buyers emerge on any selloff rather than capitulation. 

Successful traders will tell you that it’s all about timing. The timing on when to get in on any selloff in Bitcoin, or any stock, will make all the difference. 

Source: CBOE, Bloomberg.  

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large US bank for more than 20 years.

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