Volatility Reset Suggests Recent Gains May Be Short-Lived
As noted yesterday, the VIX 1-Day indicated a 1.6% move—and that’s precisely what we saw today. These aren’t any magical predictive powers on my part; they’re simply market mechanics at work. So, while the market did rise and some might believe “we’re so back” and ready to “run hot” again, I’d caution that this may not be the case. I noted in Sunday’s write-up:
One would think that once the VIX 1-Day stabilizes, the stock market will also steady, and the rally would likely stall. A VIX 1-Day reading of 25.7 suggests a potential move in the S&P 500 of about 1.6%, which would take the index right up to the 6,650 region.
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The question, of course, is what comes tomorrow—and that’s not as easy to answer. Given that the VIX 1-Day closed at 14.7, a more modest 90-basis-point move is being priced in for tomorrow. The only issue is that Jay Powell is scheduled to speak tomorrow morning around 11:30 a.m., and it’s quite possible that implied volatility rises into that engagement. If volatility rises ahead of Jay Powell or after, for that matter, the stock market should decline.
Technically, the S&P 500 reached its 20-day moving average today but failed to hold above it.
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Additionally, the index saw a gap higher at the open today, following a straight-line drop into Friday’s close. These types of patterns tend to be unstable and are often retraced fairly quickly. Given that volatility has largely reset and the index failed at the 20-day moving average, there’s a good chance today’s rally gives back its gains, resulting in that gap being filled over the next couple of days.
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In the meantime, with the bond market closed, I have no idea how credit spreads would have traded today, nor do I know where overnight funding costs would have settled. So, delving any further into today’s price action is pretty much useless.
More By This Author:
A VIX Reset May Spark A Temporary S&P 500 Rebound
Why Did The S&P 500 Drop So Fast?
The 3 Ghosts Of Tighter Financial Conditions Loom Over Equities
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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