WSJ's Gunjan Banerji: This is really 'the first sign of fear' that we're seeing in the markets

Fear is back on Wall Street as volatility bets tied to the VIX hit a six year high earlier this week. And our next guest writes in the Wall Street Journal that traders are positioning for a prolonged stretch of volatility. Gunjan Banerjee is the lead writer for the Wall Street Journal’s live markets coverage as well as a CNBC contributor. Gunjan, great to have you with us. Thanks Melissa. Six year high levels seem like a big deal, but in particular, if you think about what was going on six years ago, because February 2018 was a huge volatility event, crazy, I mean that was Vol Mageddon, right? We saw a huge explosion in volatility. At the time, SP 5500 lost around 10%, a very short time frame. What traders said was alarming about this time around was that we’re only three to 4% off the highs in the SP500 and yet we’re seeing the Stampede into VIX bets, into volatility trades and wagers that this recent turbulence that we’ve seen over the past two weeks will continue. And this is really the first sign of fear that we’re seeing in the market after really going in a straight line up for months now. I mean the idea that we had actually gone on Friday, what what did we get to like 20 or 19? I mean really historically that’s not very high. But in a world where the VIX had been regularly at 15 or 16 or 14 or even lower, that seems like a huge spike. What are traders saying in terms of how high volatility can get and eventually how that will impact the markets? Because volatility is just a bet that it’s up and down, right. It’s not necessarily that stocks will go down. That’s true, Melissa. But what’s remarkable is that the past few weeks or months we’d actually seen bets on upside volatility, bets that things would get volatile but NVIDIA shares would keep skyrocketing or the S&P 500 would get more volatile in terms of big jumps up. People were afraid of missing out on those rallies to the upside and now we’re seeing downside hedging. We’re seeing actual hedging the types of trades that would profit if the stock market did fall. Think of these as insurance like contracts. You know the the demand for stock insurance increased significantly over the past two weeks and this is a remarkable shift from you know the roses and sunshine that we saw the prior months. And I think a lot of it comes down to inflation, geopolitics and of course the path of treasury yields which I think are finally spooking the market after you know the stock market being pretty resilient in the face of rising yields recently. So when you’re talking about a bets on volatility in terms of you know hedging, are you also seeing commensurate trades in the option side for SPY and for NASDAQ 100 in terms of hedging, you know it’s interesting, a lot of traders have been telling me this is concentrated in the VIX complex and and that’s interesting because as you pointed out, we have seen the VIX rise to some of the highest levels since October, November. And while there has been a pickup on the S&P 500 side, that’s what the higher VIX is reflecting. People are placing call options bets tied to the VIX itself and that’s that’s really a true volatility bet that’s about that things could kind of get haywire and we’re seeing that in the futures market as well where pricing indicates that people are expecting more volatility over the next month or two than say in the next three months. So there is this near term fear that this whole complex is reflecting right now. What do you think is you know, what do you think are the fundamental reasons for it being a two to three month bet? What, what events on the horizon is just the uncertainty about interest rates at this point and probably increase in certainty now that that chair Powell said what he said yesterday in terms of keeping rates where they are for longer. Right. So Melissa, what I did here was that a lot of this activity started picking up Friday heading into the weekend and that was a lot of the Geopol. Yes, it was the geopolitical fears where people were saying we don’t know what’s going to happen here And that led to that rush into Victoria’s options bets. It continued this week and it’s been incredibly elevated, especially when you think about the calm that we saw previously. Do you think traders are thinking in their head that we will see that 10% decline, the same that we saw during Valmageddon? Look, I think we’re 3 to 4% off now. And what traders have been telling me was it’s almost like people woke up and realized, hey, the stock market doesn’t go, it can go down. It turns out we can have a little bit of volatility and I think people forgot that and I think we could see more of that today. We have a treasury auction at 1:00 PM. These have become like the hottest you know, things to watch on Wall Street. They used to be really sleepy, but they’re causing a lot of volatility. We saw that last week after the inflation data where the 10 year recorded the biggest one day jump since 2022 after kind of an ugly auction, some ugly inflation data and and I think we need to stay tuned for that today. Yeah, a a down 10% actually lines up on the technical side of things for the S&P 500. So that’s interesting that they’re targeting that or thinking about that in terms of the time frame and on the technical side that’s where we see the S&P getting down to the bottom channel. So that’s an interesting level.