The VIX index jumped sharply this week as risks to the financial market remained elevated. The index jumped to a high of $19.67, which was 30% above the lowest level this month. It remains below the important point at $20 and about 42% below the highest point this year.
Fed decision, banking crisis
There are two main reasons why the VIX index popped. First, risks to the banking sector remains at an elevated level despite the First Republic Bank rescue on Monday. The bank was seized by the FDIC and then quickly sold to JP Morgan.
The market believes that the regional banks crisis is not over yet, which explains the performance of the SPDR Regional Bank ETF (KRE), which has crashed by over 30% in the past three months. The KRE, as I wrote here, tracks the biggest regional banks in the US.
Beneath the surface, the situation was much worse for the fund. For example, the PacWest share price plunged by over 30% while Western Alliance dropped by over 15%. It was a sea of red in the fund, which signals that more banks could collapse soon.
Regional banks are also highly exposed to the commercial real estate industry, which is going through major challenges.
The VIX index also jumped as investors waited for the upcoming interest rate decision by the Federal Reserve. The Fed is between a rock and a hard place since it needs to keep fighting inflation while preventing a hard landing to the economy.
Analysts expect that the Fed will hike interest rates by 0.25% and then point to a strategic pause. Alternatively the bank will decide to pause as it observes the performance of the banking sector. Any rate hike could break things in the market.
Meanwhile, the fear and greed index has moved to the neutral point of 53. The market momentum, stock price strength, put and call options, and safe haven demand are all in the greed area while the junk bond demand has moved to extreme greed.
VIX index forecast
The four-hour chart shows that the CBOE VIX index jumped sharply as risks in the market continued. The index has now formed a shooting star pattern, which is characterized by a big body and a long upper shadow. It is also hovering at the 50-day and 25-day moving averages.
Therefore, I suspect that the index will retreat in the coming days as sellers target the next key resistance at $16. A move above the $20 will signal that buyers have prevailed, which will lead to more upside
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