Volatility Collapse Fuels S&P 500 Rally

Stocks rallied sharply as volatility was crushed after news of a deal between the U.S. and Iran eased tensions in the Middle East and allowed oil prices to fall.

The VIX 1-Day, which closed around 19 on Friday, traded down to 13.5 today, while the VIX Index fell to 16. That was really the story of the day. Volatility has largely reset, and with much of that repricing now behind us, I would think the biggest gains in the index are likely already in the rearview mirror.

From here, the market may shift into a more grinding, range-bound move heading into OPEX on Thursday, with volatility-related tailwinds becoming less supportive after today’s sharp decline in implied volatility.

Micron rose about 10% on the day, but more importantly, the company is set to report earnings on June 24. Seven-day implied volatility is now above 120%, an exceptionally high level that reflects elevated expectations for the report.

The stock is also heavily skewed toward call positioning, similar to what has been seen in Broadcom and other AI-related names. That suggests investors continue to lean aggressively bullish heading into earnings, which can create a setup where expectations become increasingly difficult to exceed.

The bond market saw far less excitement. In fact, the 30-year Treasury yield finished the day nearly 1 basis point higher at 4.98%. That may not sound like much, but the yield traded as low as 4.92% intraday, making for a fairly significant move over the course of the session.

Tonight brings the BOJ rate decision, and the market has largely priced in a rate hike from the central bank. Meanwhile, USD/JPY is on the verge of breaking above 160.

The BOJ will need to deliver a hawkish enough message to stabilize and strengthen the yen. Otherwise, the currency risks pushing above the highs last seen in July 2024. At this point, a rate hike alone may not be enough, as markets will likely focus more on the path of future policy tightening and whether the BOJ signals additional rate increases later this year.

The gold rally stalled at the 10-day exponential moving average, which has acted as resistance since mid-May. A failure to break above that moving average would likely lead to even lower gold prices.

That’s all

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

BOJ (Bank of Japan) — Japan’s central bank, responsible for setting monetary policy and interest rates.
Call Positioning — Investor exposure to call options that benefit from rising stock prices.
Exponential Moving Average (EMA) — A moving average that places greater weight on more recent price data.
Implied Volatility — The market’s forecast of a security’s future price fluctuations based on options pricing.
OPEX (Options Expiration) — The date on which listed options contracts expire.
Treasury Yield — The annual return earned by holding a U.S. Treasury security.
USD/JPY — The foreign exchange rate representing the value of the U.S. dollar relative to the Japanese yen.
VIX Index — A measure of expected stock market volatility derived from S&P 500 options prices.
VIX 1-Day — A short-term volatility measure estimating expected market volatility over the next trading day.

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