We wrapped up last week's note reflecting on how a brief period of calm felt after the hectic summer. Well, that calm didn’t last long—this week, volatility was back in full swing.
Monday started quietly, but by Tuesday, tensions reignited. Iran retaliated for the recent deaths of key Hezbollah commanders and the bombing in Beirut. 180 rockets later, the VIX surged back to the 20 mark, spurred by a disappointing ISM manufacturing report. For the fourth consecutive month, the index has been well below 50, signaling contraction in the sector. Yet, despite the price swings, stocks managed to hold their ground.
That’s been the theme of the week: Thursday felt like a repeat of Tuesday. Early in Europe, an article from the FT caused a stir, suggesting that Israel might target nuclear facilities in Iran in retaliation for the recent attacks (you can see where this is going). By day’s end, that escalated to a “mere” hit on an oil field.
We barely hit publish on our latest Signal du Jour when volatility in the oil sector surged again, with prices spiking nearly 10%—the highest jump in two years. Yet, once again, stocks proved resilient, this time boosted by a strong ISM services report, which showed the sector has been going strong for six consecutive months. Is there a growing decoupling between the two engines of the US economy?
When you compare the performance of XLK, XLI, and XLF to the broader market (SPY), the answer isn’t obvious—each is still posting a massive 20% gain so far this year, with three months left in 2024.
Then came Friday, with all eyes on the September job report. And what a report it was—252k jobs added, well above market and analyst expectations.
So, what’s next as we head into the final stretch of the year? In exactly four weeks, we’ll face one of the busiest periods of 2024, with the November 1st job report, the US election on November 6th, and a critical FOMC meeting on November 7th. There’s a lot of uncertainty ahead, which justifies the current level of implied volatility—not outrageously high, but worth keeping a close eye on as events unfold.
Let’s start with what we do know: after Friday’s strong job report, the FOMC is almost certain to deliver another 25bps rate cut. Powell has made it clear, stating multiple times that one data point won’t change his broader view, and he has stuck to that. A further cut is still expected in December.
As for the election, it’s as unpredictable as ever, and we won’t attempt any firm predictions. On the economic front, the word “recession” hasn’t been heard in weeks, and it seems the market, while carefully watching the data, has accepted that August’s concerns may have been a false alarm. So, the burden of proof now lies with realized volatility to justify the current premiums in SPY options. For example, last week SPY realized 13.5, and slightly more over the last 30 days. In that context, a VIX at 20 seems a bit overpriced.
But one can’t ignore the high geopolitical tensions right now. Even if everything seems carefully orchestrated between the global powers involved, a single misstep from any of the players could have disastrous consequences for the world order. This week, we saw the usual flood of articles calling for oil to hit $100 soon.
Here’s where we draw the line between staying informed and falling into the trap of speculation. Speculation is like noise—it’s dangerous to your P&L. It’s the variance of the mind, those small distractions that make us tinker with what was carefully and rationally put in place.
Can your portfolio handle a spike in volatility to 50, with you unable to react fast enough? If you’re uncomfortable with that question, it’s time to reassess.
Is your position built on careful analysis—like ours, which is 95% data-driven—allowing you to set aside subjective biases and focus on objective facts? If the answer is no, you should reevaluate your approach.
That’s your first and only job. Trying to predict whether Israel will bomb Iran on the anniversary of the October 7th attacks is not.
In other news
The final month of the presidential race has officially begun, and anything is still possible. On Saturday, Elon Musk was seen campaigning alongside Donald Trump, warning voters that Democrats would take away democracy, free speech, and guns. Quite the agenda.
It’s hard to wrap our minds around how someone as brilliant an entrepreneur as Musk—who’s transforming industries with Starlink and working to bring humanity to Mars—can promote such polarizing issues like guns and fail to admit that Twitter (or X) has become a far less pleasant platform over the past few years.
We still use it, but only because there’s no better alternative (and maybe because we’re a bit addicted). That doesn’t make the takeover a success, though. In fact, quite the opposite, and we are not the only ones who felt it. What has happened to Musk is a bit of a mystery, and it’s a little unnerving to think that he’s also leading Neuralink, a company that could one day interfere directly with the human brain.
But that’s speculation, of course.
Thank you for staying with us until the end. As always, here are some interesting reads from last week:
As Milei faces off with the airline unions in Argentina, it seems like a good time to check on his progress after nearly a year in power.
offers a preliminary scorecard.Good news on the medical front! We learned from the FT that we may be past the peak of obesity. Sure, the latest round of pills helps turn the tide, and while some may see it as "cheating," what matters most is that it’s working.
That’s it for us this week. We wish you a great week ahead and happy trading.
Ksander
Data, charts, and analysis are powered by Thetadata and Dataiku DSS.
Have access to our indicators using our API.
Book a consultancy call to talk about the market with us.
Contact at info@sharpetwo.com.
Disclaimer: The information provided is solely informational and should not be considered financial advice. Before selling straddles, be aware that you risk the total loss of your investment. Our services might not be appropriate for every investor. We strongly recommend consulting with an independent financial advisor if you're uncertain about an investment's suitability.