In a week filled with market turbulence, Wall Street is now raising doubts about the authenticity of Monday's unprecedented surge in the Cboe Volatility Index (VIX), commonly known as the fear gauge. The VIX recorded its largest ever intraday jump of 42 points, pushing it above 65, a level typically associated with extreme panic. However, options professionals are now questioning whether this surge truly reflected market sentiment or was influenced by technical factors and the calculation methodology.

The VIX is not directly traded but derived from the prices of options on the S&P 500 Index. This has led experts to argue that instead of relying solely on the VIX, a better gauge of market sentiment can be found in the futures tied to the VIX. The VIX futures showed much smaller increases during the same period when the VIX experienced its massive jump. This discrepancy has led some to believe that the initial VIX spike may have overstated the fear among investors.

Various technical factors are being considered as potential contributors to the distorted VIX surge. The calculation of the VIX itself is based on a chain of S&P 500 options, and during periods of market turbulence, bid-ask spreads can widen significantly, potentially inflating the VIX beyond what is justified. Thin liquidity during pre-market trading can also result in small orders having a disproportionately large impact on prices.

Another factor that may have influenced the VIX surge is the presence of certain volatility strategies. The dispersion trade, typically involving bets on lower swings in an index and higher volatility in individual stocks, may have played a role. The unusual rise in the cost of S&P 500 options compared to options on Apple Inc. and Microsoft Corp. suggests that dispersion traders may have contributed to the volatility spike.

While no one disputes that the market experienced significant anxiety on Monday due to negative macro developments and concerns over the US economy, some analysts caution against treating the VIX surge as an indication to buy the dip. The discrepancy between the VIX and its futures raises concerns about the true market sentiment, with some arguing that focusing on the futures and ETF flows provides a more accurate picture.

The VIX surge has significant implications for Wall Street models that predict stock market movements. Its sudden spike is typically associated with investor capitulation and is often seen as a potential setup for a market bounce. However, the uncertainties surrounding the authenticity of Monday's VIX surge are causing concerns among market participants.

The S&P 500 has managed to recover in the three sessions that followed the VIX surge, and investors continue to pour money into equity-focused exchange-traded funds. The debate regarding the true significance of the VIX surge continues, but market experts caution against making investment decisions solely based on the fear gauge's spike. As the market continues to navigate through uncertain times, it remains crucial to rely on multiple indicators and real trade data to determine market sentiment and direction.