Stocks Rallied on the Odds of a Rate Hike
Tony Dundisluca analyzes market volatility across equities and fixed income, noting that while both market health models show structural weakness, Friday's equity rally suggests the market may be pricing in Fed rate hikes as stabilizing. Treasury rates are accelerating higher (particularly at the front end), creating a flattening yield curve, though the MOVE index remains relatively calm.
Summary
Tony Dundisluca covers multiple dimensions of market volatility in this Wall Street Journal episode. He examines two proprietary models: the HRV (Heart Rate Variability) model, which measures market health and stability, showed a significant divergence in early September where the S&P 500 hit a new high but the 10-day moving average did not, signaling deteriorating conditional health. This was followed by a crash driven by volatility market instability. The early warning system model continued to improve through Wednesday/Thursday, moving from orange into yellow zones, though it spiked on Friday due to building tension in Treasury markets. Both models show signs of caution, with the HRV model's moving average rolling over—a bearish signal after nearly a month without new highs.
In the VIX complex, the VIX entered a compression regime (Bollinger bands inside Keltner channels) since late August. On September 4th it bounced off the lower band and ramped toward the upper band, turning pink on Thursday above the upper Bollinger band, suggesting an expansion regime. Friday's equity rally pushed the VIX back inside the bands. The V-IX (VIX futures volatility) peaked just over 95, well below the 103 level seen earlier, indicating demand for VIX calls without panic levels. The average true range of the VIX hit historic lows (1.2-1.3 range), suggesting a likely move higher in volatility going forward.
The S&P 500 showed the Bollinger bands tightening but not in an official compression regime. Notably, there was no significant overvixing during the week's selloff—the black line of the over/under VIX measure remained near zero, indicating the VIX did not move more than the S&P's movement suggested it should. Friday actually saw undervixing (VIX falling more than justified by the equity rally), partly due to options decay heading into the weekend.
VIX futures term structure remains in healthy contango (upward sloping), with the red line (today) higher than last week's blue line but the curve flattening slightly. The speaker watches the October-November spread (currently 0.65 points) and notes the spot VIX is 2.6 points below the October contract, providing cushion before the October contract could reach parity with November. The September contract expires Wednesday, making October the front month, which incorporates midterm election event risk.
Volatility composition shows individual stock volatility peaked on Tuesday the 8th while implied correlations (blue line) continued spiking until Wednesday the 10th, then both declined Friday. This lack of confirmation between the two metrics, combined with individual stock volatility hitting new lows, is noted as a relatively constructive signal.
The Treasury market emerges as the critical focus. The 10-year rate (TNX) has been accelerating higher since February, with particular acceleration this week following hot PPI data and strong non-farm payrolls last week. The MOVE index (Treasury options volatility VIX equivalent) sits at 82, just above the 80 lower bound of Bassman's normal range of 80-120, suggesting limited stress in Treasury options despite substantial rate moves. Both 5-year and 10-year inflation break-evens are accelerating higher.
The Treasury curve is flattening dramatically because front-end rates (2-year and 5-year) are accelerating higher faster than back-end rates (10-year and 30-year). On a weekly chart with 21-day rate-of-change metrics, the 2-year bond is declining (rate rising) in the second percentile—faster than 98% of days over the past year. The black line showing the 10-year minus 2-year spread has declined since late January, approaching potential inversion. The speaker notes this flattening creates market pressure and may explain why the MOVE index hasn't spiked more—the 30-year is not accelerating as quickly as the front end.
The speaker theorizes that Friday's equity rally, despite rising Treasury rates throughout the day, may reflect the market understanding that Fed rate hikes (now being priced in at 25-50 basis points for the September FOMC meeting) represent Fed stabilization and control of the market, which is ultimately beneficial for equities. A Treasury market in freefall is destabilizing; Fed action signals someone is "grabbing the wheel."
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 39 of Vol Street Journal™! My first full week back from vacation did not disappoint. Rates are on the move and equity vol attempted to breakout, yet bears still have their work cut out for them. In this week’s episode, I evaluate deteriorating signals from both market models alongside an attempt by VIX to move from a compression regime into an expansion regime. I also review over/undervixing dynamics, changes in the VIX futures curve, a divergence between single-stock volatility and implied correlation, accelerating front-end Treasury yields, and the MOVE Index breaking above its summer range. 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
- The HRV market health model showed a significant divergence where the S&P 500 hit a new high in early September but the 10-day moving average of the model did not, signaling deteriorating market health despite the price high and presaging the subsequent market downturn.
- The VIX did not experience chronic overvixing during the week's selloff despite the market becoming more volatile, suggesting the market was not in panic mode, and the significant undervixing on Friday (VIX down ~2 points when it should have only dropped ~1 point) was partly driven by options decay into the weekend.
- Individual stock volatility peaked on Tuesday the 8th while implied correlations continued spiking until Wednesday the 10th without confirmation, then both declined Friday—this lack of continuation and the formation of new lows in individual stock volatility represents a relatively constructive signal in what would otherwise be a heating market.
- The Treasury curve is flattening because front-end rates (especially the 2-year) are accelerating higher in the second percentile (faster than 98% of historical days) while back-end rates accelerate more slowly, with the 10-year minus 2-year spread approaching potential inversion since peaking in late January.
- Friday's equity rally despite Treasury rates finishing higher throughout the day may reflect the market pricing in Fed rate hikes as stabilizing market action—the Fed taking control to prevent Treasury freefall, which is ultimately beneficial for equities even though it means higher borrowing costs.
Topics
Transcript
[0:04] Hello and welcome to episode 39 of Wall Street Journal, your unscheduled but mostly weekly deep dive into the volatility markets. I'm your host Tony Dundisluca and we have gone from a rather boring market to a uh slightly more exciting market this week. So, we've got a lot to cover. We're going to start with a look at the two market models where there's been a fair amount of uh volatility in the models themselves. So, we're going to dig a little bit deeper and see what has been driving that volatility. From there, we're going to swing over to the volatility complex. So, the VIX complex, all things VIX, VIX, and VIX futures, where we're going to…
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