No One is Focusing on This Asset Being in a Bubble

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JPMorgan believes that the VIX is the one asset in a bubble that no one is focusing on.

There are always bears who will call the market overvalued or state that the financial markets are in a bubble. History has shown us that eventually, they end up being right and saying "I told you so," but setbacks are inevitable and necessary for healthy markets. The VIX, commonly known as the fear indicator, has been all over the place since the start of the coronavirus pandemic.

Massive volatility has shaken traditional finance teachings to their core and left many investors unsettled with the current market. This leads many back to the so called safe-haven word for tumultuous times, bubble.

JPMorgan quant and derivatives strategist Marko Kolanovic said on Wednesday, "If we want to be thorough in our search for bubbles, there is another asset that is currently in a bubble – the VIX."

"The VIX is now disconnected to underlying short term S&P 500 realized volatility," Kolanovic adds, "indicating a bubble of fear and demand from investors looking to hedge or profit from a hypothetical market selloff." On Thursday, stocks sold off heavily and the VIX was up more than 30 percent in intraday trading.

"Given the VIX is at a near-record premium to actual equity volatility (~400-500% above the 'fair value') we think selling the 'VIX bubble' represents a good market opportunity," Kolanovic said.

Kolanovic also cited that much of the current market is being held up by highly valued tech stocks that benefited from the pandemic.

"While there is a lot of talk about bubbles, it is hard to see one in the broad equity market, where a dominant group (FANGs) practically hasn’t moved for 6 months despite massive amount of stimulus and an expected economic recovery, Financials that have barely recovered 2020 losses, and Energy that is still down 25% from last year despite a commodity bull market," Kolanovic writes.

"We do see some relatively contained market segments that appear to be in a bubble related to Electric Vehicles (EV), renewable energy and innovations stocks. These sectors only make up a small part of the market (e.g., electric vehicles make up only 2% of the S&P 500), but we do see segments that remain cheap such as energy where positioning remains heavily underweight. We believe that this is only the first inning of the market rally, and that the rotation into cyclicals could play out for the next year," he added.

Market paradigms seem to be changing before our eyes.

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