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The S&P 500 rallied to start the day, rising about 50 to 60 basis points at its intraday high, but those gains faded as the implied volatility crush largely ran its course. As noted yesterday, the VIX 1-Day closed at 13.6, and we typically see 50-60 basis-point moves on such days when volatility declines. The VIX 1-Day opened around 9 and rose throughout the session, finishing near 12. In that sense, the volatility crush was even shorter-lived than expected.
More importantly, signs of nervousness are building at the margins. The VVIX, which measures the implied volatility of the VIX, rose on the day, and the S&P 500 left-tail index also climbed. That’s significant because, on the surface, it may appear that little is happening, but underneath, volatility is building and becoming increasingly evident.
Constituent volatility, as measured by VIXEQ, remains extremely elevated relative to the VIX index, which reflects index-level volatility. The spread is still around 21.5. Historically, when the spread reaches these levels and widens, it has often preceded fairly meaningful corrections.
While things may appear calm on the surface, there is still significant change beneath. This remains a warning signal. As we move through the rest of earnings season, implied volatility on individual constituents should continue to decline, as it typically does. As that happens, the spread will likely narrow. That process could involve unwinding positioning, which may result in a sharp move to the downside. Again, none of this is new to readers of this commentary or members of the service.
In addition, some sectors and recent moves have become extremely overextended on technical grounds. The Materials sector ETF, XLB, is now showing a weekly RSI of 77 and is trading above its upper Bollinger Band on the weekly chart. Both are classic signs of an overbought condition, suggesting the sector may be stretched in the near term.
The Industrials sector ETF, XLI, is now trading above its upper Bollinger Band on the monthly chart, with an RSI of 78.3. Historically, when the sector has become this stretched, it has typically led to extended periods of consolidation.
That was the case in 2018, 2013–2014, and 2007. When momentum reaches these levels on a monthly timeframe, it generally suggests the sector may struggle to sustain further upside without first working off those overbought conditions.
The challenge is that sectors such as Industrials and Materials, along with Staples (XLP) and Energy (XLE), are largely driving the outperformance of the equal-weight S&P 500 (RSP) relative to the cap-weighted S&P 500. That dynamic helps explain why, on a day-to-day basis, the S&P 500 often looks relatively calm. The market appears to be rotating leadership—pushing one group higher while another lags—effectively balancing itself out, because the big Mag 7 names alone can no longer do that lifting.
I suspect this may be a byproduct of zero-DTE options activity and heavy daily trading in short-dated options. I don’t have hard evidence to prove that, but based on observation, it would make sense. If a large amount of positioning is concentrated in specific strikes—whether calls or puts—dealer hedging flows could influence price action around those levels.
For example, if there is significant open interest in a 6,950 call and positioning effectively pins the index near that strike, the broader market may need to rotate beneath the surface to keep the index aligned with where options are priced. That could contribute to dispersion within the index, with individual sectors moving more aggressively even while the headline index appears stable.
-Mike
Glossary by ChatGPT
Bollinger Band: A technical indicator that plots standard deviation bands above and below a moving average to identify overbought or oversold conditions.
Cap-Weighted Index: An index in which components are weighted based on market capitalization, giving larger companies greater influence.
Constituent Volatility: The implied volatility of individual stocks within an index.
Dispersion: The degree to which individual securities within an index move differently from one another.
Equal-Weight Index: An index that assigns the same weight to each constituent, regardless of market capitalization.
Implied Volatility: The market’s forecast of a security’s future volatility as derived from options pricing.
Open Interest: The total number of outstanding derivative contracts that have not been settled.
Relative Strength Index (RSI): A momentum oscillator measuring the speed and magnitude of price movements to identify overbought or oversold conditions.
Spread: The difference between two related financial metrics or instruments.
VVIX: An index measuring the implied volatility of the VIX itself, often referred to as the volatility of volatility.
VIX 1-Day: A short-term measure of expected volatility in the S&P 500 over the next trading day.
VIXEQ: An index measuring the average implied volatility of S&P 500 constituents.
Zero-DTE Options: Options contracts that expire on the same day they are traded.
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.
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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.
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