Thin Volume and Low Volatility Challenge Stock Market Breakout Dreams
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The VIX 1-Day closed below 10 today, so if you are expecting a big move higher following the CPI report, it is unlikely to come from an implied volatility perspective, at least initially. Any meaningful move would need to be driven by real buying rather than volatility expansion. That said, volatility can always be pushed higher overnight to set up the CPI crush that everyone has grown to know and love.
The S&P 500 looks fine at this point, but I certainly do not think this is the major breakout that so many have been dreaming about since the end of October. As it stands, the index is not even trading a full bar above resistance at the trendline. We saw similar behaviour at the start of both 2022 and 2025.
The market can continue to grind higher by 10, 20, or even 30 basis points, but given how low both realized and implied volatility are, combined with one-month implied correlation sitting at 7, good luck. It might as well have been December 22, given how little volume traded in S&P 500 futures today.
I guess the powers that be can crush the 3-month VIX down to the July 2024 lows.
Maybe those same players can push the 1-month implied correlation to 2.
Or maybe the VXTLT bond market volatility measure can fall to levels not seen since 2019.
The point is that, in my view, the market’s underlying mechanics are not positioned for a face-ripping move higher. It can continue to grind, but at some point, volatility will mean-revert higher, and we are likely to see an unwind similar to what occurred at the end of October and into November.
It is also somewhat interesting that, despite all of the problems facing oil over the past four years, XLE has never really broken down. Instead, it has largely moved sideways throughout that entire period. One would imagine that if oil were ever to break out decisively and begin rising, it could prove quite bullish for the sector. XLE now appears to be sitting at a very important resistance level and is probably worth watching closely.
That could be very important if the move in oil above the downtrend actually holds and prices begin to work their way back into the $60s. For now, $55 appears to be the floor for oil, and it remains one of the few commodities that has not meaningfully moved higher. It is certainly worth watching for a potential upside move.
-Mike
Glossary by ChatGPT
Implied Correlation: A market-derived measure of how closely individual stocks are expected to move together over a given period.
Implied Volatility: The market’s expectation of future price fluctuations, derived from option prices.
Mean Reversion: The tendency of a financial variable to move back toward its historical average over time.
Realized Volatility: The actual historical volatility observed in an asset’s price movements over a defined period.
VIX: A volatility index that measures expected market volatility implied by S&P 500 options.
VXTLT: An index measuring implied volatility in options on long-term U.S. Treasury bond ETFs.
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This might not be directly related to this post. But, I've been wondering about the impact of eSLR reform. I read an article that estimated that it would free up additional ~200B of capital for the big banks to buy treasury bonds. Do you think this would be material enough to help compress down the 10 - 30 yr yields?
Dreaming since Thanksgiving