The VIX May Be Approaching A Turning Point

Stocks moved higher today, as implied volatility continued to decline following its sharp rise on Friday. The model suggests the VIX still has room to fall further, so it wouldn’t be surprising to see the rally continue another day or so. We have to remember, though, that volatility will flip next with a heavy schedule that includes the Fed, ECB, BOJ, and a PCE report. Plus, we still have a mid-term election coming, and mega-cap tech earnings. So we’re more likely closer to the floor.

The dispersion index looks like it’s in a rising wedge, and at this point in earnings season, it wouldn’t surprise me at all if dispersion started to unwind and correlations began to rise.

The Italian-Germany 10-Year rose to 1.16%, putting it back at its widest point this period. It just seems to me from looking at this spread alone its heading a direction that moves wider, and given the importance of this spread, it would seem to me that spreads globally are going to widen.

-Mike

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Glossary by ChatGPT

Basis Point: A unit equal to one-hundredth of a percentage point, commonly used to measure changes in interest rates and bond yield spreads.

Correlation: A statistical measure of how closely two securities or assets move in relation to one another, ranging from -1 to +1.

Dispersion Index (DSPX): A Cboe index measuring the market’s expectation of differences in returns among S&P 500 constituent stocks, derived from index and individual-stock option prices.

European Central Bank (ECB): The central bank responsible for monetary policy in the euro area.

Implied Volatility: The level of expected future price fluctuations embedded in options prices.

Italian-German 10-Year Yield Spread: The difference between Italian and German 10-year government bond yields, commonly used as an indicator of sovereign credit risk and financial stress in the euro area.

Mega-Cap Stocks: Companies with exceptionally large market capitalizations, generally among the largest publicly traded companies.

Personal Consumption Expenditures (PCE) Price Index: An inflation measure tracking changes in prices paid by US consumers for goods and services and used by the Federal Reserve to assess inflation.

Rising Wedge: A technical chart pattern characterized by converging upward-sloping trendlines, often interpreted as a potential bearish reversal signal.

VIX: The Cboe Volatility Index, which measures the options market’s expectation of S&P 500 volatility over the next 30 days.

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