We've got 50.
In hindsight, it’s easier to spot the subtle cues from the Fed’s carefully manicured communication. A few strategically placed articles in key financial outlets were enough to recalibrate market expectations and make the news less of a surprise.
Despite analyzing the news from every negative angle—whether the Fed is anticipating a recession, severe tensions in the job market, or the start of a new inflationary cycle—the market reacted positively.
After a volatile (but not overly so) end to the session on Wednesday, the S&P 500 closed the week at a new all-time high, adding 1.48%, while the Nasdaq followed with a similar performance at 1.41%. The VIX closed at 16.15, and VVIX meaningfully under the 100 at 94.71.
A few weeks ago, we advised our audience not to expect a return to the 12/13 range in the VIX and the ultra-low volatility regime we experienced in the first half of 2024. That message hasn’t changed much, but… we’re starting to see signs we can’t be ignored.
First of all, realized volatility has dropped quite a bit from its peak in August.
Considering that this Fed meeting had the potential to shake the markets, it was a relatively quiet week despite realizing 17.8% over the last seven days. If realized volatility continues to decline, the market will struggle to justify paying a premium for insurance where the risk is minimal. So, while a return to 12 isn’t on the cards yet, being long options seriously lost its appeal.

We can already hear the objections though: What about election risks? And the admitted weakness in the job market that Powell emphasized during the 45 minutes of the press conference on Wednesday? And what if consumer spending starts to drop, too?
Sure, these are possible scenarios, but until proven otherwise, the market not only assigns them a relatively low probability of having a lasting impact on prices but also doesn’t see them as substantial risks capable of driving up volatility.
We’ll carefully monitor this over the next few days: Will the market spiral into a negative narrative that could lead to realizing 22% over a week in the S&P 500, or will we gradually cool down from here? Next week, we will receive the latest GDP readings, followed by another speech from Jay Powell, yet it’s hard to expect anything major, and that is what the term structure seems to show: it is the lowest and the most backwardation we’ve observed in almost two months.
Careful here—we really want to emphasize this nuance: we’re not saying there’s no risk and that stocks will keep going up forever. What we are suggesting is that the market will likely need to see some meaningful data pointing towards a recession before volatility spikes again and before more stocks start to sell off… and not just any stocks, by the way.
With summer officially over, it’s interesting to observe the recalibration that has taken place: the Nasdaq was comfortably leading at the halfway mark of the year but is now trailing the S&P 500. Now that we’re entering a rate-cutting cycle could the Nasdaq stage a comeback and outperform the S&P 500? It’s not impossible, and we’ll watch its performance closely over the next few weeks.
So, what should we expect? More of the same: the market may be less forgiving with weaker economic data, and volatility should rise when that happens. But unless the lousy news becomes persistent, things should normalize relatively quickly. This could form the basis of a volatility strategy: size your positions carefully and consider shorting when the VIX spikes on “bad” news. Give the market some time to digest it and move on, leaving you with some comfortable premium.
We’re currently in a regime that made volatility trading so popular among retail traders during the COVID years—it means reverts and becomes “easier” to trade. While we wouldn’t say the last six weeks have been “easy money” (especially during the peak stress in early August), things have calmed down and normalized now: profit opportunities should be there for those who can manage their risks adequately and avoid selling too early to seek out the best possible trades.
In other news
Steve Eisman has been suspended indefinitely from his position at Neurberg for his comments on X about Gaza. The remarks were, at the very least, insensitive, but the bigger issue stems from the fact that they were directly associated with the firm’s logo. It’s a reminder that while some institutions may seem too big to fail, even a rock star manager who gained fame and accolades for predicting one of the biggest crises in history can face the consequences if they fly too close to the sun.
Thank you for staying with us until the end, as usual, here are a few good reads we’ve had from last week.
Despite inflation having normalized quite significantly from its peaks in summer 2022, it is still the talk of the town. In this article, the FT wonders if central banks have played the perfect game.
In this review of Sakana and Strawberry, the latest state of the art AI models,
argue that the models are rather unimpressive. The broader reflection is on how each new AI milestone, once thought to signify true intelligence, is eventually dismissed as another technical trick, leading to a reevaluation of what it means for AI to be genuinely intelligent or dangerous.
That is it for us this week. We wish you a fantastic week ahead and happy trading.
Ksander
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