Markets Rise but Volatility and Liquidity Dynamics Suggest a Tougher Path Higher

Stocks finished the day higher. On the surface, this looked like a typical “vol down, stocks up” type of move. The VIX 1-day closed yesterday above 20 and traded down to around 12, while the VIX Index traded to roughly 20.50. Meanwhile, the VIX 1-day finished today around 17, so it is possible to see another opening move that helps push the market higher.

Still, this is a tricky spot for the market given what is happening in Iran, and I would imagine we continue to see implied volatility remain higher than usual.

We have seen this pattern repeatedly over time: markets rally as volatility gets crushed and hedges are closed, but once the market runs out of volatility to crush, the rally tends to stall.

One-month realized volatility has generally been trending higher more recently, and that is important because if realized volatility continues to rise, it will likely put upward pressure on implied volatility. Right now, daily moves greater than 80 basis points will push realized volatility even higher. This probably suggests, for now, that the VIX will have a difficult time falling much further.

In the meantime, the SPX reached the 20-day moving average and stopped there. Combined with a large amount of call gamma around the 6,900 level, it may make it more difficult for the S&P 500 to rally for a second day tomorrow.

Tomorrow is also a Treasury settlement day, with about $13.1 billion due to settle. The S&P 500 has risen on only 12 of the last 34 settlement dates, or about 35% of the time. On average, the index falls by about 41 basis points on those days. When it does rise, the gain averages only about 39 basis points; however, when it falls, the decline averages roughly 84 basis points, resulting in a cumulative drop of about 13%.

Non-settlement days are the polar opposite, as the chart shows. This does not mean the index cannot rise tomorrow—just that the odds do not favor it.

The staples suddenly do not look so strong. It is amazing what happens once we get past earnings and that volatility dispersion trade is no longer working as hard. In the meantime, a neckline has formed on what appears to be a potential double top. That makes the $87 level an area that needs to hold; otherwise, the stock could decline back to roughly $82.

Meanwhile, oil is sitting just below resistance at $78, and a breakout would likely put oil on a path back to the $84 to $87 range, and possibly even higher. The next couple of days will be very important for oil.

Ok, that’s all for now.

Mike

Glossary by ChatGPT

Basis Point – One hundredth of a percentage point (0.01%), commonly used to describe changes in interest rates or index movements.

Call Gamma – The rate of change of delta for call options; large concentrations can influence market movements as dealers hedge their exposure.

Implied Volatility – The market’s expectation of future volatility embedded in option prices.

Neckline – A support level in chart patterns such as a double top or head-and-shoulders that confirms the pattern if broken.

Realized Volatility – The actual volatility observed in an asset’s price over a specified historical period.

Treasury Settlement Day – The date when newly issued U.S. Treasury securities are paid for and delivered, which can influence liquidity and market behavior.

Volatility Dispersion Trade – A strategy that involves trading the difference between index volatility and the volatility of individual component stocks.

VIX Index – A widely followed measure of expected 30-day volatility in the S&P 500 derived from options prices.

VIX 1-Day – A short-term volatility measure derived from near-dated options that reflects expected volatility over the next trading day.

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