S&P 500 Struggles to Hold Early Gains as Implied Volatility Reasserts
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The S&P 500 saw a slight bounce today, rising just 25 basis points—not a very impressive move. More importantly, the index rallied by roughly 70 basis points early in the session but gave back those gains through the afternoon. Part of the morning rally appeared to be an unwind of volatility that had risen sharply yesterday, as evidenced by the 1-day VIX opening around 8. However, with implied volatility starting from such low levels, it had nowhere to go but higher, and as volatility rose, the S&P 500’s gains faded.
The Left Tail Index has been steadily rising, and today it pulled back somewhat, likely reflecting a decline in put skew rather than call skew. This suggests that implied volatility declined more quickly for puts, indicating that some hedges were unwound early in the session.
Today’s price action did little to improve the index’s technical outlook; if anything, the late-day pullback highlights how much the market is struggling at this point.
Despite all the talk of rate cuts, December 2026 Fed funds futures actually rose by 7.5 basis points on the day to 3.18% and are now at their highest level since August. For now, this may not seem like a major development, but with a clear downtrend and resistance near 3.25%, a breakout in Fed funds futures would come as a significant surprise—to me and to many others.
-Mike
Glossary by ChatGPT
Basis points: A unit of measure equal to one hundredth of a percentage point, commonly used to describe changes in interest rates or yields.
Call skew: The relative pricing difference of implied volatility between out-of-the-money call options and at-the-money options.
Downtrend: A sustained pattern of lower highs and lower lows in price over time.
Fed funds futures: Derivative contracts that reflect market expectations for the future level of the federal funds rate.
Hedges: Financial positions designed to offset or reduce the risk of adverse price movements in an asset.
Implied volatility: The market’s expectation of future price fluctuations derived from option prices.
Left Tail Index: A measure designed to track downside risk perceptions embedded in option markets.
Put skew: The degree to which implied volatility for out-of-the-money put options exceeds that of at-the-money options, often reflecting downside risk demand.
Resistance: A price level where an asset historically struggles to move higher due to selling pressure.
S&P 500: A widely followed equity index representing 500 large-cap U.S. companies.
Technical outlook: An assessment of market direction based on price patterns, trends, and technical indicators.
VIX: A volatility index that measures expected near-term market volatility implied by S&P 500 options.
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