The S&P futures closed at 7660. That’s the exact upper edge of the volatility box I’ve been marking since May.
Every time we’ve tagged 7660, this tape has turned into a crap fest. We closed spot on it Friday.
Friday looked like a snapback rally. I care far more about the other thing that snapped back.
Correlation came back. We opened with 93 products trading on one side of the market, and I haven’t seen an open like that since April.
That isn’t a bullish read or a bearish read. It tells me the index is getting ready to move after four and a half months stuck in the same range.
The VIX argued the opposite. It measures 30-day implied volatility, so it can’t see short duration options at all.
Short duration vol went up on Friday. The VIX feels like the last instrument to know.
Look at the expected move instead. Last week priced a $97 move across four days and we cracked right through the lower edge.
Next week prices $125 across five days. That’s a considerable bump higher in risk, and the implied volatilities load toward Thursday and Friday.
Two events sit on top of that. We get the FOMC, and we get quadruple witching with huge SPX open interest coming off the board Friday morning.
Here’s what I broke down in the weekend update:
- The S&P futures closed at 7660, the upper edge of the volatility box. Above it we stay fine. Below it, I look for acceleration down to the gravity point at 7511.
- 7511 sits dead center of the box, and the index products carry massive open interest right around that 7500 level.
- Next week prices a $125 expected move over five days against $97 over four days last week. Monday’s implied volatility prints 8%, which makes no sense to me with geopolitical risk this heated.
- The Fed Watch tool puts a quarter point hike near 87% for this meeting. The hike is already priced. Kevin Warsh’s speech is not, and that’s where the volatility gets felt.
- The 10-year sits near 5%, a level we haven’t seen since July of 2007. I’m selling bond puts at 104 around 30 delta, roughly 70 days out, and I’ll add at 102 and 100.
Oil bothers me more than any of it. It’s sitting in a threatening posture, and a breakout from here drags demand destruction into the economy.
Oil reverberates straight back into the S&P 500 as volatility. That’s why I don’t want to go home long into this weekend.
Correlation returned for one session. It has to show up again on Monday and Tuesday for me to trust it.
