Market Volatility Is Nearing the Breaking Point
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Stocks managed to rise again today, making things a bit more exciting than yesterday, but also somewhat nauseating. Perhaps it’s because my central air conditioning is broken, and I haven’t slept well for a few nights. Or maybe it’s because I received word today that the needed replacement part is still 3 to 5 days away. Either way, today felt unusually annoying.
Examining the S&P 500 futures, it is clear that a compression pattern is forming within the rising wedge. I’m not entirely crazy—this compression is confirmed by the Bollinger Band width, now at its lowest level since February. Additionally, volume in futures has been steadily declining, even as the index reaches the upper Bollinger Band.
Meanwhile, 10- and 20-day realized volatility in the S&P 500 futures have now returned to their lower ranges, nearing some of the historically low levels we saw during mid-to-late 2024. With the 10-day realized volatility at just 7%, the S&P 500 futures would need daily moves of less than 44 basis points—either up or down—to continue pushing realized volatility even lower.
With realized volatility becoming increasingly compressed, we’re starting to see the VVIX pick up again—it rose today, climbing to 92.
Even the 1-month implied correlation index is tightening at this stage.
It’s also worth noting that the BTIC S&P 500 Total Return Futures have drifted back toward their lows, continuing to diverge from the cash market.
Anyway, I’m not sure how many more times they can keep saying “talks are progressing well” or “deals are expected to close soon.” I’m also uncertain how much “vol supply” remains in the market. Perhaps the 0DTE bros and the recent breadth thrust groupies can push things a bit further, but we’ve reached that familiar point where the market compresses too tightly—and then suddenly pops. It feels like we’re just about there.
Good luck
Mike
Terms by ChatGPT
Realized Volatility:
Historical volatility calculated from past price movements of an asset, measured as the standard deviation of returns over a given period.
Basis Point (bps):
A unit of measure equal to 0.01%. For example, 44 bps equals 0.44%.
VVIX (Volatility of Volatility Index):
Measures the expected volatility of the VIX (Volatility Index) itself—essentially, how much investors expect volatility to fluctuate.
Implied Correlation Index:
Represents market expectations for how individual stocks will move together. Lower implied correlation suggests stocks are expected to move more independently.
BTIC (Basis Trade at Index Close):
A trading strategy or futures product allowing investors to trade futures based on the closing index level, used frequently in total-return futures.
S&P 500 Total Return Futures:
Futures contracts that reflect returns from both price appreciation and dividends of the S&P 500 Index.
Vol Supply:
Short for volatility supply—refers to the market’s capacity or willingness to sell volatility, often through option-selling strategies.
0DTE (Zero Days to Expiration):
Options contracts expiring the same day they are traded. A significant rise in popularity due to their short-term speculative appeal.
Breadth Thrust:
An indicator signaling strong market breadth, occurring when a large proportion of stocks move together strongly in a short period, suggesting bullish momentum.
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