Stocks Drop Despite Implied Volatility Melting
Michael Kramer | Jun 28, 2022 03:42AM ET
Stocks finished the day lower by 30 bps on the S&P 500 yesterday. I think it was the best rallying day for the market this week. Things start getting more challenging at the end of the week. Wednesday, Powell will be speaking at a panel hosted by the ECB, Thursday will be the PCE Inflation report (the Fed preferred inflation metric), and Friday will be ISM. While any one of these events could quickly spark a rally, they could just as easily spark a sell-off. But all three also warrant investors wanting to have some form of hedges in place.
The S&P 500 was set up to rally from the go. It was set up in one of those ways where it should have rallied, and I think the fact that it didn’t is bearish. The S&P 500 futures were trading about 40 to 50 bps higher going into the open, and the VIX was trading higher. The market was primed to have one of those gaps and go openings with volatility melting all day, but that is not what happened.
h2 VIX/h2The VIX gapped higher at the start of yesterday, climbing to around 28.6, and traded lower all day, finishing just under 27.
The SPY gapped higher but gave those gains back almost immediately and failed to put together a sustainable rally, even with the VIX dropping. I interpret this to imply that sellers in the market yesterday were plentiful enough to counter the usual option-related games.
The current pattern in the S&P 500 looks like the patterns we have seen throughout the bear market. It is similar to what we just experienced, starting around May 20 and lasting until June 9 and at the end of March, before the index fell off a cliff. If the patterns work similarly, falling off a cliff, it should fill the gap at 3,800 and around 3,650.
The VVIX just closed a gap from June 7, and the last time it was this cheap to buy options on the VIX, stuff started happening in the market.
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Yesterday the TIP ETF fell sharply as real and nominal yields increased. The TIP ETF has been the leader and has been telling us where the QQQ is likely to go for months, and at least at this point, I think this is still working.
The rally in Zoom Video(NASDAQ:ZM) may be near its end. There appears to be a rising wedge, but the trends remain bullish for now. So it may have a bit further to rise, but not much. If the stock breaks support at $107.5, then it seems likely the rally is over.
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