Stocks Rise As Oil Sinks, Options Market Doesn't Believe It

Stocks finished the day higher by roughly 1%, though they had been up significantly more at one point earlier in the session—nearly 2%—following a sharp decline in the price of oil. The move came amid speculation that the war in Iran may be over soon, given President Trump’s willingness to negotiate. However, those claims appear to have been denied by the Iranian government, leaving investors largely uncertain about what happens next. Regardless, WTI oil prices fell below $90, and the market tried to run with it.

Perhaps more importantly, the S&P 500 rallied right into its short-term moving average resistance—a level that has capped every attempt at a bounce going back to March—and failed. That tells you a lot. The index has been unable to break through this ceiling, and until it does, it’s hard to get too constructive on the market. The pattern remains the same: rally into resistance, fail, and head lower.

That said, the index is no longer in a deeply oversold condition. The RSI has climbed off the lows, and we’ve moved away from the lower Bollinger Band. But “no longer oversold” and “bullish” are two very different things. If today’s failure at resistance follows through, we could very well be looking at new lows tomorrow.

What stood out today was the VIX. Given the magnitude of the decline in oil and the attempted rally in stocks, you’d expect implied volatility to have come down meaningfully. It didn’t. The VIX barely budged. That’s a signal in itself—it tells you that the options market isn’t positioned in a way that would allow a drop in volatility to provide a tailwind for equities. And today’s price action confirmed that. The boost from falling vol that you might typically expect in this kind of setup just isn’t there right now.

On top of that, there was notable put activity heading into tomorrow’s expiration. That kind of positioning raises the odds that today’s gains don’t stick and the market opens under pressure tomorrow.

It all comes back to the same story: until oil meaningfully breaks, and until the index can clear its overhead resistance, rallies are going to keep getting sold.

-Mike

Glossary by Claude

VIX — A measure of expected stock market volatility over the next 30 days, derived from S&P 500 option prices and often called the market’s “fear gauge.”
RSI (Relative Strength Index) — A momentum indicator that ranges from 0 to 100, used to assess whether a stock or index is overbought or oversold based on recent price changes.
Bollinger Band — A technical analysis tool that plots bands above and below a moving average based on standard deviations, helping identify when prices are unusually high or low.
Implied Volatility — The market’s expectation of how much a security’s price will move in the future, reflected in the price of its options.
Options Expiration — The date on which an options contract expires and can no longer be exercised, often leading to increased trading activity and short-term price swings.

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