Stock Market Outlook Signals Volatility as S&P 500 Turns Overbought

Stocks finished higher on Friday, rising another 1.2%, as optimism surrounding the war in the Middle East helped drive trading, alongside options expiration flows. However, weekend headlines suggest that some of that optimism may be based more on hope than on reality, as Iran pushed back against President Trump’s claims about reopening the Strait of Hormuz. From where I sit, it remains unclear what is actually happening.

IG weekend oil prices are trading higher by around 4%, suggesting oil could open higher by a similar amount if those gains hold. The same is true for the US Tech 100 (a proxy for the NASDAQ 100), which is trading lower by roughly 70 basis points, implying futures may open lower by a similar margin. Beyond the expected opening levels, there is little additional signal to extract from this information.

The S&P 500 is now technically overbought, with price trading above the upper Bollinger Band and the RSI above 70. Of course, the rally could extend further, but the odds at this point would favor either a pullback or a period of sideways consolidation. Additionally, following its sharp move higher, the index has formed a broadening wedge pattern. These are not easy patterns to interpret. A breakout to the upside is certainly possible—and may even be favored given the prevailing bullish trend—but more than anything, it reflects a growing sense of indecision in the market.

I have always struggled with these types of patterns. So at this point, I think it is worth watching these for a failed breakout attempt or throw over. If you can consolidate for a few days above the upper trend line, or if that trend line becomes support, it strengthens the case for a breakout to the upside targeting around 8,000 on the spx. While breaking down, it would push us to fresh lows.

Meanwhile, implied volatility in the TLT moved back to its lowest levels since the pandemic again this past week—somewhat surprising given what is taking place globally. Additionally, realized volatility has been steadily trending higher, so while the market has been pricing lower implied volatility going forward, realized volatility has yet to show signs of rolling over.

Realized volatility at 11.5% implies roughly a 72-basis-point daily move in TLT, but with 9-day realized volatility at just 7.5%, it is possible that 1-month realized volatility begins to decline, which would validate the move lower in VXTLT. However, it would only take around a 50-basis-point daily move in TLT for volatility to shift back to a rising trend. (Learn More: Reading Volatility, Part 1: What Volatility Actually Is — And The Rule Of 16)

The sharp decline in bond market volatility certainly helps explain part of the explosive move in equities. However, with bond market volatility already near its lows, it is fair to ask how much further it can fall—and what the odds are that it begins to rise from here. At this point, the probability of higher bond market implied volatility appears elevated.

-Mike

Glossary by ChatGPT

Basis Points: A unit of measure equal to 0.01%, commonly used to describe changes in interest rates or yields.
Bollinger Band: A technical indicator using volatility bands placed above and below a moving average to identify overbought or oversold conditions.
Broadening Wedge: A chart pattern characterized by diverging trendlines, often signaling increasing market indecision and volatility.
Implied Volatility: The market’s forecast of a likely movement in an asset’s price, derived from option prices.
Options Expiration Flows: Trading activity driven by the expiration of options contracts, often influencing short-term market movements.
Overbought: A condition where an asset’s price has risen too far, too fast, and may be due for a pullback.
Realized Volatility: The actual historical volatility of an asset’s price over a specific period.
Relative Strength Index (RSI): A momentum oscillator that measures the speed and magnitude of price movements, typically used to identify overbought or oversold conditions.
Throw Over: A temporary move above a resistance level in a chart pattern that fails to sustain, often leading to a reversal.
VXTLT: An index measuring implied volatility for options on long-term U.S. Treasury ETFs, often used as a gauge of bond market volatility.

Disclosure
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. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

Megaphone in the S&P, Vol Compression in Bonds