3 reasons why the CBOE VIX index has tumbled to 2020 lows

The VIX index tumbled to the lowest point since 2020 as concerns about the American economy eased and as stocks surged. The index was trading at $14.60, signaling that investors are getting upbeat about the American economy. It has dropped by more than 50% from the highest level this year.

Risks ease and stocks surge

The VIX index has tumbled for three main reasons. First, the recent concerns about the banking sector have eased as most regional bank stocks jump. The S&P Regional Bank ETF (KRE) has jumped by almost 2% in the past 1 month. In this period, highly-risky regional banks like PacWest and Western Alliance have soared by double digits.

Therefore, investors believe that these banks will not follow the path of Credit Suisse and First Republic, which collapsed earlier this year.

Second, the VIX index has plunged because of the recently passed debt ceiling deal in Washington. While the deal was not perfect, it prevented the US from defaulting on its obligations. Such a default would have pushed US stocks sharply lower and the VIX upwards. Historically, the VIX has an inverse relationship with the S&P 500 index.

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Third, the index has dropped recently because of the rising hope that the Federal Reserve will not hike rates in its June meeting. In a statement last week, the new vice chair said that he will support pausing rate hikes. He believes that a pause is necessary to give the Fed more time to assess the impact of the last hikes.

All these factors have pushed American stocks sharply higher, with the Nasdaq 100 index hovering at the highest level since April last year. The S&P 500 index has jumped to its August 2022 highs.

VIX index forecast

On the 1D chart, we see that the CBOE VIX index has been in a strong bearish trend in the past few months. In this period, it has managed to drop below the key support at $15.56, the lowest point on April 28th. 

The VIX index has dropped below the 50-day exponential moving average while the MACD has dropped below the neutral point. By moving below the support at $15.56, it means that bears have prevailed and that the index will continue falling. If this happens, the next level for the index to watch will be at $14.

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