Oil, Credit Spreads, CTA Flows and Volatility Signal a Changing Market Regime
Members of Navigating the Market knew 6,900 was the ceiling before the week started. They had the settlement calendar that called 3 of 5 weak days. They saw credit spreads widening to November levels before it made headlines — and they had the gamma levels, CTA flip zones, and volatility framework that mapped every turn in between.
This is what the daily reports look like. The free one below is yours — here are some of the titles from this week’s paid reports:
Key Takeaways
6,700 is the Line — Below It, Support Thins Dramatically: The S&P 500 closed below 6,800 for the first time on Friday, and the put wall at 6,700 is the last major gamma concentration before a near-vacuum down to the 6,500–6,600 zone, where a November gap remains unfilled.
Volatility Backwardation Sets Up a Possible Monday Snapback: The VIX term structure is in full backwardation — one-day VIX at 32.5, nine-day at 30.5, the VIX index at 29.5, three-month at 27.5 — and the implied-to-realized spread is stretched, suggesting a volatility crush could spark a sharp but likely short-lived rally early in the week.
Oil, Credit, and Financial Conditions Are Converging Into a Stagflationary Signal: Oil at $91 is pushing credit spreads wider, bond market implied volatility (MOVE index) to 81, and the dispersion trade has fully unwound — all pointing to tightening financial conditions just as the jobs report printed -92K, with CPI on deck this week.
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Fully Edited Transcript By Claude
CTA Flows and Systematic Selling Pressure
This week, we saw markets get rocky again and oil prices surge. The S&P 500 futures fell 1.3% on Friday. I’ve been building a CTA model to track where some of these systematic flows become more important, calibrating it against numbers I’m seeing published on social media.
What the model shows is that we’ve been in a period where CTA flows are active, and we’re getting to a point in the index where they may begin selling more aggressively and exiting positions further. The orange line in the model represents the medium-term level, and for most of this week, it acted as a support level. I don’t know if that’s coincidence — it hasn’t always done that in the past, though there have been instances of it. The shorter-term levels have also acted as support and resistance areas.
The more important point is that we’re in an area — 6,700 to 6,750 — where these flows could become more prominent. Despite the news and the headlines, if you’re below a certain level in the index, there are potentially negative systematic flows out there. That’s very important to be aware of.
S&P 500 Breaks Below 6,800 — Key Gamma Levels
More importantly, the S&P 500 on Friday closed for the first time below the 6,800 level. This has been a very important level because now that it’s broken, it opens the path to lower levels and into the 6,700s.
What’s interesting is that 6,700 is currently the main area where there’s lots of put gamma built up. Once you get past 6,700, the 6,600 and 6,500 strikes essentially neutralize each other — there’s just as much gamma concentrated at 6,600 as at 6,500, and it’s significantly less than what’s at 6,700 right now. What this suggests is that once we break below 6,700, the market could start targeting the 6,500–6,600 level.
We’re in a negative gamma regime, which means market makers are going to be selling and buying based on the direction of the market. Delta positioning has also gotten very light, so there’s just not a lot of support from an options perspective at these levels.
Technically, once you get below 6,720, there’s a giant gap down around 6,600 that’s still open from mid-November. You can see how gamma levels and option positioning are really at play even within the technicals — that’s because of how important they are in setting support and resistance over time. You can also see 6,550 as another area of key support.
There is a viable chance the market begins to drift lower over time. I just don’t know if that’s going to happen on Monday.
VIX Term Structure: Backwardation and Volatility Crush Setup
The reason I think Monday may not be the day we break lower is the VIX term structure. I created a Pine Script using all the VIX data in TradingView to build a term structure, and what it shows right now is that the VIX is in pure backwardation — all the shorter-dated implied volatility levels are higher than the later-month contracts. VIX one-day is at 32.5, VIX nine-day at 30.5, the VIX index at 29.5, VIX three-month at 27.5 — and they go all the way down from there.
The VIX three-month implied volatility versus three-month realized vol is at a pretty wide spread. On a one-month basis, it’s also at a really wide spread. From a volatility standpoint, this market is stretched right now.
What that means is we could be in a position where we get a bounce on Monday. It’s possible that early in the week, we open lower — the market feels the stress of the weekend or whatever has happened with Iran — say, the market opens around 6,680, and then you start seeing forced buying as volatility resets. But the rebounds could be somewhat limited because of the systematic flows potentially working in the background.
Going forward, it’s going to be a really tough period for the market with lots of choppiness. I think it could be more of a slow grind lower, something more reminiscent of 2022 than the straight-line drop we saw in 2025. That could be the environment until we get more clarity on a lot of different things.
Oil Surge, Bond Volatility, and Implied Correlation Reset
One of the biggest uncertainties right now is what’s happening with oil, which has moved up to around $91. Oil implied volatility is obviously very high. This is pushing bond market implied volatility — the MOVE index — up to around 81.
This is worth paying attention to because when you invert the MOVE index and overlay it with the S&P 500, you can see that equities trade closely with bond market implied volatility. That makes sense because bond and equity volatility tend to trade together.
One major development that evolved this week is that the spread between three-month implied correlations and the dispersion index has come all the way back down to around 14.8, putting it back to nearly where it was at the end of December. The dispersion-implied correlation trade has reset very quickly because of everything happening in the marketplace. This tells me that the dispersion unwind may be completely done at this point and may not be much of a factor anymore.
Credit Spreads, Financial Conditions, and the Stagflationary Setup
High-yield credit spreads have started to widen. You can use HYG as a guide — when you invert it, you can see how changes in HYG correspond with changes in the high-yield OAS. This matters because high-yield credit and implied volatility trade very closely together.
If we start seeing high-yield credit spreads come under pressure — because of what’s happening in AI markets or in some of the private credit funds I pointed out months ago — that could push equity implied volatility higher. It’s not a perfect relationship, but spikes in implied volatility and spikes in high-yield credit spreads tend to correspond with one another.
If high-yield credit spreads move higher, you’re probably going to see bond market implied volatility moving higher, equity market volatility moving higher, and all of this plays directly into what’s happening with oil. Oil rising as quickly as it has is doing two things: it’s pushing a stagflationary message — because we just got a terrible jobs number — and it could lead to financial conditions tightening because when oil goes up, gasoline prices rise, and that becomes a tax on the consumer.
When you take HYG inverted and overlay it with the NFCI — the National Financial Conditions Index — they trade right along with each other. They trade with bond market implied volatility. They trade with the VIX. If all these things are coming together, it’s a sign that financial conditions are tightening, which has a negative impact on the economy and on stock prices.
A simplistic way of looking at it: when financial conditions are easing, stocks do well. When they’re tightening, stocks don’t. Really, you want to use the earnings yield of the S&P 500 — that tends to move more closely with financial conditions. And generally, when financial conditions are tightening, stocks are not doing well.
The Week Ahead
Right now, technically, the market is at an important level of support. 6,700 is the next key level. Systematically, if we stay below 6,750, there’s potential for negative systematic flows. Below 6,800, there’s potential for big violent moves because we’re in a negative gamma position. But there’s also the possibility of face-ripping rallies because implied volatility is so high and will need to normalize at some point.
It’s quite possible that Monday — if we get through the weekend without major news or developments — the implied volatility that got bid up into the final hour on Friday could unwind very quickly, producing a very big move up. But beyond that, there are lots of other things going on. This isn’t the same macro regime we’ve been in for the last two years, where it was all about AI being great and running the economy hot. Things have changed dramatically over the last six or seven days because of what’s happened to oil, what’s happened in the job market. And this week, we get the CPI report, which we haven’t even touched on yet.
Defined Terms and Jargon
CTA (Commodity Trading Advisor): Systematic, trend-following hedge funds that use quantitative models to buy or sell futures based on price momentum; their flows can amplify moves when the index crosses key threshold levels.
Negative Gamma: A market condition where options dealers must sell into falling markets and buy into rising markets to hedge their books, amplifying price swings in both directions.
Put Wall: The strike price with the heaviest concentration of put option open interest, often acting as a support level due to dealer hedging activity around it.
Backwardation (VIX Term Structure): A condition where shorter-dated volatility measures are higher than longer-dated ones, suggesting elevated near-term fear that may be approaching a peak and could reset quickly.
Dispersion Trade: A strategy that profits from the difference between index-level implied volatility and the implied volatility of individual stocks; when implied correlations surge, this trade unwinds as the spread compresses.
MOVE Index: The Merrill Lynch Option Volatility Estimate, which measures implied volatility in the U.S. Treasury market — a rising MOVE signals increasing uncertainty in rates and often correlates with equity market stress.
NFCI (National Financial Conditions Index): A weekly index from the Chicago Fed that tracks the tightness or looseness of U.S. financial conditions across money markets, debt, equity, and banking — higher readings indicate tighter conditions.
High-Yield Credit Spread (OAS): The option-adjusted spread between high-yield corporate bond yields and Treasuries; widening spreads signal increasing credit risk and tighter financial conditions that typically weigh on equities.
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On target summary here. I am glad to hear you mention the NFCI which is published by the Fed every Wednesday. I like this indicator most for showing a change in market direction. It is easier for me to use the NFCI than credit spreads, which I think lag the market and are less obvious to interpret to me.