Image Source: Pexels

Things got ugly quickly this morning.I had just finished taping an IBKR podcast[i] where our guest echoed my ongoing theme of “don’t fight the tape, but insure against it,” when a few minutes later the President issued a post on Truth Social that contemplated “a massive increase of Tariffs on Chinese products.”That was clearly not something traders wanted to hear!Stocks and yields plunged, the VIX soared, and gold rebounded. The reactions may say as much about recent market complacency as they do about the policy ramifications.

If the S&P 500 (SPX) closes at the levels that are prevailing while I type this, it would be the first move of greater than 1% since August 22^nd and the first down move beyond -1% since August 1^st.We’d become quite accustomed to relatively quiescent markets with an upward bias, so it was quite shocking to see stocks in a quick freefall. That is why we saw an immense reaction in VIX.  Traders were clearly scrambling for protection during the downdraft that gave back more than two weeks of SPX gains and pushed the Cboe Volatility Index to levels not seen in over two months.

SPX, 2 Weeks, 10-Minute Candles

(Click on image to enlarge)

Source: Interactive Brokers

VIX, 3-Months, Daily Candles

(Click on image to enlarge)

Source: Interactive Brokers

Investors need periodic reminders that risk is always present, even when it is obscured by consistent returns. Today is one.I was asked this morning about why stocks were originally trading higher, and my flippant answer was, “because it’s a business day.”As is now somewhat typical, I woke up to flattish pre-market futures that edged up throughout the morning before giving way to a larger advance once the opening bell rang.That’s not a criticism of trader behavior – skilled traders are good at spotting patterns, and this was an obvious one. 

That said, it does feel (so far) like a different mindset has crept into a piece of the market’s psyche.I’ve had several conversations with experienced institutional investors, and a not insignificant percentage of them have expressed increasing concerns about the sustainability of the current AI-driven rally.Professional considerations have kept them invested in the relatively small cadre of tech stocks that have driven market performance, but they don’t seem as happy about it recently.They too have been raising questions about the latest onrush of capital intensive, often circular deals, that could imply overbuilding or capital misallocation. But few investors showed a willingness to risk the potential underperformance that could result from exiting these investments too quickly.Hence the abrupt reaction when a piece of difficult news reared its head.

We will need to see whether and how the markets rebound from today’s shock.One of the most reliable patterns in recent years has been to buy significant dips.We had a fleeting attempt at a bounce shortly after SPX sold off about -1.5%, but as I type this, it was unsuccessful.It is entirely possible that today’s drop was a one day reset that would once again reward dip buyers.It is also possible that we get a longer reset.I have a nagging feeling that we are closer to the end of the game than the beginning.In baseball terms, it seems more like we are in the 8^th or 9^th inning, and hopefully not in extra innings with a runner on second base.

[i] Scheduled for release Monday morning

More By This Author: