A crucial stock market indicator just got its most bullish reading on record

A running bull in Pamplona gets in the stock-buying spirit.REUTERS/Desmond Boylan

How low can the VIX go?

That seems to be the question hedge funds are asking themselves as they continue to bet that the so-called stock market fear gauge will fall further from current near-record-low levels.

Positioning on VIX futures, which allow investors to bet on whether or not the stock market will see big price swings, is now the most bearish on record, according to Commodity Futures Trading Commission data going back to 2004.

And a bet against the VIX generally translates to a bullish wager on the S&P 500, since the VIX and the S&P 500 tend to move in opposite directions. That means investors are the most confident about further gains in stocks than at any point in more than a decade, at least according to this measure.

Business Insider / Andy Kiersz, data from CFTC

It’s the latest optimistic signal being flashed by a seemingly unstoppable stock market that’s more than eight years into its latest bull cycle, the second-longest on record. Less than three weeks ago, the CBOE Equity Put/Call Ratio fell to its lowest level of the year, 20% below the measure’s bull market average, implying that traders are making a small number of bearish bets compared to bullish bets.

Amid the apparent lack of worry, not everyone is convinced.

To JPMorgan’s quant guru Marko Kolanovic, the current low-volatility environment is a disaster waiting to happen. What worries Kolanovic, the firm’s global head of macro quantitative and derivatives strategy, is the ever-present possibility that the market will make an unexpectedly sharp move. He thinks that if the VIX, which is currently sitting near 10, spikes up to 20, the short-volatility strategy could be at risk of “catastrophic losses.”

Still, equity experts around Wall Street aren’t sounding the alarm bells yet. They see the S&P 500 ending the year at 2,414, less than 0.1% from last Friday’s closing price, according to a Bloomberg survey of 19 strategists.

In other words, they see the market sitting still. An ideal situation for those betting against the VIX.