Stocks Fell on Fed Day and the VIX Barely Flinched
Tony Dundesluca analyzes market conditions following Fed action, finding that despite equity selloffs on FOMC day, the VIX barely reacted—indicating lack of panic. Multiple market divergences and improved health metrics suggest overall market resilience, with healthy mega-cap rotation and supportive volatility structure despite some caution warranted as rates potentially cool.
Summary
Tony Dundesluca presents his weekly deep dive into volatility markets, covering multiple analytical frameworks to assess market health. His HRV (Heart Rate Variability) model improved significantly Thursday into Friday, moving from orange into the green zone, indicating improved market stability and resilience. The early warning system model also reached green territory—a rare occurrence—driven by relief in Treasury markets. Both models reaching green simultaneously suggests limited room for improvement, though it indicates strong underlying conditions rather than danger.
On the VIX complex, Dundesluca highlights several important divergences during Wednesday's FOMC selloff. While the S&P 500 printed lower lows and the VIX spiked to higher highs, the broader measure of implied volatility (Vivix) printed lower highs, suggesting the options market expressed lack of concern despite market stress. The market also "under-VIXed," meaning the VIX rose less than the S&P's decline would suggest, indicating absence of panic despite new lows. VIX futures similarly printed lower highs compared to previous spikes, reinforcing this divergence signal.
The VIX futures curve shows significant premium in the October contract at 18.04 versus spot VIX at 14.8—nearly four V points of spread—primarily due to coverage of the midterm elections. The curve remains in healthy contango with thin spreads between October and November contracts. While the flatter front-end curve could theoretically invert to backwardation if spot VIX spiked significantly, the substantial cushion (over three V points) provides protection against initial market shocks.
Market mechanics reveal healthy conditions: index rotation metrics show normal correlation levels at 0.77 with very low dispersion (0.1), indicating tight and similar correlation relationships across indices. Mega-cap stocks display perfect rotation characteristics with very low 10-day correlations (0.06) and high dispersion, meaning mega-caps are not moving in sync—a healthy condition. Simultaneously, the NASDAQ is reasserting leadership, which Dundesluca identifies as a calming, stabilizing force.
Volatility composition analysis shows implied correlations got "crushed" to just above 9, approaching warning levels below 8. Individual stock volatility moved sideways since September 14th, offset by falling implied correlations to enable the VIX's decline to 14 handle. The ratio of individual stock volatility to VIX has started rising, suggesting individual stocks may outperform the index volatility measure going forward.
Treasury markets show evidence of cooling after recent acceleration. The 10-year rate reached approximately 5.0% this week, but the rate of change declined, indicating slower acceleration. Five- and ten-year inflation break-evens dipped after weeks of climbing. The MOVE index closed at 80.635, barely within Harley Bassman's normal range of 80-120, and actually declined on the week despite rate increases—suggesting some momentum loss in the rate move. Dundesluca attributes some MOVE index relief to event risk dissipation post-FOMC.
Credit markets show early warning signs: high-yield spreads have started widening after an extended tightening period, though they remain historically tight indicating good liquidity. Investment-grade spreads tightened on strong demand. The LQD/TLT ratio (investment grade bonds to Treasury bonds) continues trending upward, indicating risk-on behavior and preference for credit over Treasuries.
Overall, Dundesluca concludes that despite recent volatility and headlines about market stress, underlying market structure and health metrics suggest conditions are turning constructive. While potential weakness windows may exist post-OPEX, the underlying market strength should provide significant headwinds against sustained downturns.
About this episode
For a quick tour of Vixed Signals—how I use the volatility complex, market mechanics, my models, and other factors to frame these episodes—watch the overview here: https://www.youtube.com/watch?v=Pe_kf1dyrXA Welcome to Episode 40 of Vol Street Journal™! In episode 40 of Vol Street Journal, I review market behavior in response to the FOMC's rate hike, VIX futures expiration, and quarterly OpEx. I also examine the two market models, divergence signals in the VOL complex, market mechanics, and trends across Treasury and credit markets. Topics covered: -Healthy readings from the HRV and EWS models -Broad volatility surface divergences and undervixing during FOMC -October/November VIX futures spread flattening and contango cushion -Single-stock volatility consolidation -Mega-cap basket rotation and index correlation dispersion -Rate-of-change deceleration in 10-year yields and MOVE Index response -High-yield credit spread behavior alongside LQD/IEF ratio trends Here we go! My links: https://macro-ops.com/ https://vixedsignals.substack.com/ https://x.com/volstreetj https://x.com/vixedsignals What Is Macro Ops? Macro Ops is a global macro research and consulting firm that works with a wide range of clients — from hedge funds and pension funds to family offices and sovereign wealth funds. We also partner with individual traders and investors. Our clients typically manage significant capital, from millions to billions of dollars, so our research is designed to meet the depth and sophistication their strategies require. https://macro-ops.com/ ***All content, opinions, and commentary by Macro Ops is intended for general information and educational purposes only, NOT INVESTMENT ADVICE
Key Insights
- On FOMC day when the S&P printed lower lows and VIX printed higher highs, the broader measure of implied volatility (Vivix) printed lower highs, indicating the options market was not expressing panic despite the selloff
- The market 'under-VIXed' on the FOMC selloff, meaning the VIX rose less than the S&P's decline suggested it should have, which Dundesluca interprets as a signal that the market was not bracing for a big selloff
- The October VIX futures contract carries nearly four V-points of premium over spot VIX (18.04 vs 14.8) primarily because it covers the period of the midterm elections, creating significant cushion before spot VIX could threaten front-month contracts
- Mega-cap stocks are in 'perfect rotation mode' with very low 10-day correlations (0.06) and high dispersion, meaning individual mega-caps are not moving in sync—the opposite of problematic correlated upside that would indicate market stress
- The 10-year rate's rate of change has declined despite the rate reaching 5%, and both 5-year and 10-year inflation break-evens dipped lower, suggesting the move in rates is starting to cool off rather than continue accelerating
Topics
Transcript
[0:04] Hello and welcome to episode 40 of Wall Street Journal, your unscheduled but mostly weekly deep dive into the volatility markets. I'm your host Tony Dundesluca and we had ourselves a nice full week this week. Multiple different expirations. We had FOMC. The markets were moving. Uh we're going to jump in this week as we always do, taking a look at the two market models to see how they have evolved throughout the course of all this action. From there, we're going to swing over to the uh volatility complex of all things VIX, Vivix, VIX futures. Uh after that, we are going to uh take a look at market mechanics real [0:38] quickly just to see how…
Full transcript available for MurmurCast members
Sign Up to Access