Options Market Indicating Possibility Of 10% S&P 500 Downside In The Next Month

• The VIX is currently indicating a high degree of uncertainty in the stock market.
• This week’s payroll and ISM Manufacturing data could be the keys to the market’s next major move.
• The options market is currently pricing in a 7 percent chance that the S&P will fall another 10 percent over the next month.

A new report by Goldman Sachs analyst Krag Gregory looks at the VIX to see what market volatility is saying about the possibility that the United States could soon be entering a recession. Gregory has observed that the VIX is indicating that investors are as uncertain as ever about the near-term fate of the stock market.

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Splitting The Difference

Goldman estimates that the baseline VIX level that would indicate that the recent market weakness is nothing more than a short-term bump in the business cycle is about eighteen. On the other hand, the median daily VIX during the past three recessions has been twenty-six.

During the past week, the VIX has averaged about 22, almost exactly splitting the difference between the two scenarios.

Waiting For Data

According to Gregory, the market appears to be waiting for more data before making up its mind which way to move. “The S&P 500 straddle expiring Friday October 2nd captures both the ISM and payrolls and is pricing in a +/- 2.4% S&P 500 move this week,” he explained.

Outlook

Gregory noted that the options market is indicating an outside possibility of another major move downward by the market. “S&P 500 options are now pricing in a 7% chance the S&P 500 declines 10% over the next month,” he cautioned.

While payroll numbers are certainly the headline number of the week, Goldman expects an ISM number on Thursday of 50.0, below consensus expectations of 50.5. Gregory notes that any number below 50 could be a bad sign for market bulls.