The S&P 500 finished higher for a second straight day, and the index has just about filled the gap from Thursday. Not much has been accomplished over the last two days, which isn’t a surprise given how high the VIX 1-Day finished on Friday. The VIX 1-Day closed today at 12.5, and I would expect it to be close to 20 by 1:59 PM ET.
I seriously doubt the Fed would defy the market and raise rates one week before a midterm election. I could see a hawkish press conference, with Warsh staying tight-lipped on forward guidance.
That said, if Warsh wants everyone to know who’s in charge now, and that it’s no longer Bernanke, Yellen or Powell, he could go ahead and hike. There is certainly plenty of reason to. I think it would create a massive shitstorm, though.
Once we get through earnings tomorrow and Thursday, single-stock implied volatility should fall, and dispersion should fall with it. If dispersion bottoms around 27 to 28 and single-stock implied volatility settles around 31 to 32, implied correlation could rise meaningfully, perhaps to 15 to 20, depending on how the cycle plays out, while the VIX stays relatively flat. That matters because falling single-stock volatility usually lets hedges unwind, and the buying that follows supports the market. However, if correlation rises, hedging flows on the index may turn negative, pushing the index lower to keep index volatility supported.
Comments
Log in or sign up to join the conversation.