Stocks Are Trapped As Volatility Signals Flash Red
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It was another low-volatility, low-volume trading session for S&P 500 futures, with the cash market rising by about 40 bps on the day. As noted yesterday, the 40 bps gain resulted in 10-day realized volatility finishing at 6.85, slightly down from 6.86 yesterday. Essentially, realized volatility has nowhere to go from here unless we start consistently trading under 20 bps per day. Given how illiquid this market is and the persistent headline risk, sustained periods of such low daily moves seem unlikely.
The market obviously recognizes this, which explains why both the VIX and VVIX traded higher today.
That’s not all—both the 1-month and 3-month implied correlations also rose today.
Both IG and HY CDX index spreads widened today as well.
It’s uncommon to see higher implied correlations, rising implied volatility, wider credit spreads, and higher stock prices simultaneously. Generally, stocks trade lower when the other factors rise. This unusual combination suggests the stock market has virtually nowhere left to go from here. Technically, this indecision is clearly visible on the chart, with today’s candle positioned precisely between the upper and lower boundaries of the rising wedge pattern.
You could obviously see more grinding price action tomorrow, especially since it’s Friday, but it feels like the days are numbered at this point.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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