Forward Note - 2025/03/09
Regime shift?
What an intense week! The writing was already on the wall on Monday when the market erased all the gains from what could easily be attributed to February’s end-of-month flow. Meanwhile, the VIX pushed above 20 and never looked back. By the end of the week, the SP500 and Nasdaq had both closed down more than 3%, wiping out all post-election gains from November—a sharp shift in sentiment in a very short time.
While volatility always finds a way to settle eventually, this was one of those weeks that makes you think, Get used to it—this isn’t going away anytime soon. The VIX has finally broken out of the narrow range we’ve seen since August, where a staggering 50% of readings were stuck between 16 and 20—historically, that number is closer to 15%. Could this signal a regime shift? Many indicators are pointing in that direction.
First off, with a 7-day realized volatility of 25.7, this was the most volatile week since the regional bank crisis almost two years ago—slightly ahead of what we saw in August 2024. And it definitely felt like it. Bonus point for Thursday and Friday session: in the lead up to the employment report and one of the first crucial speech from Jay Powell regarding the monetary policy trajectory under the Trump’s administration, the SP500 repeatedly saw half-percent swings within minutes, often with no significant new information, only to reverse just as quickly. Both days saw daily realized volatility above 30, well above the 13 average over the last 6 months.
Another hard-to-ignore signal is the shape of the implied volatility term structure. Last week, we noted that at 18 and flat, it reflected pure uncertainty—no one really knew what was coming in the next few months. But now, it’s starting to tilt toward backwardation. Not extreme yet, but enough to mark a clear shift in market sentiment compared to just a month ago. Back then, the focus was on the Jevons Paradox, general dismissiveness about DeepSeek’s disruption in tech stocks, and a sigh of relief when Trump pushed back the tariff hikes by a year.
One month later, tariff uncertainty is still in the air—Thursday brought yet another last-minute delay—and the overall lack of clarity around the new administration’s policies and their economic impact is starting to weigh on the market.
This week, we learned that the U.S. economy added about 150K jobs, yet the unemployment rate ticked up to 4.1%. Enough to fuel recession concerns? Not for Jay Powell, who brushed off the question during his speech at the monetary policy council. Sticking to his usual mantra—“It’s too soon to talk about cutting rates”—he gave no indication of shifting course anytime soon, especially with potential inflationary pressures from the administration’s policies looming in the background.
And if growth concerns start to snowball while rates stay elevated, well, companies relying on easy financing could find themselves in trouble. That pressure is already showing up in the Russell 2000, which dropped nearly 4% this week while its realized volatility shot up after staying fairly mild throughout the month of January.
More concerning, the sectoral VIX for key pillars of the economy—especially financials—is climbing. Now, of course, you could look at this and say, “The market is overreacting, and in six months, this will all be forgotten.” If you’re a long-term investor, this might be a great time to pick up some bargains.
But if you’re trading volatility, risk assessment comes first. While stocks still offer a decent volatility premium - we actually wrote about a trade in the regional banks sector this week- diving into short-term options right now is a risky move. Just looking at the swings and the most recent reading for the variance risk premium in SPY, this week would have been brutal for anyone shorting 7DTE options. More importantly, this is the kind of environment where you want to neutralize the risks you don’t want to take. In this case, that means managing directional exposure.
We don’t make this recommendation lightly. We’ve always been strong advocates of focusing on trades where the edge is so clear that taking on some directional risk is justified—essentially making a calculated bet on the distribution of the underlying in two weeks' time. But in this environment, hedging delta is paramount to protecting your assets.
Realized volatility isn’t expected to cool off anytime soon, and we anticipate the market will need a few key headlines—providing clarity on both the economic and geopolitical landscape—before reverting to more normal behavior.
In other news
While Trump has turned up the pressure cooker on countries like Ukraine, Canada, and Mexico, his address to the nation made one thing clear: “He’s only getting started.” Hard to believe he’s only been in office for six weeks—and even harder to predict what’s coming next.
Some clues were supposed to come from crypto. The White House announced that Bitcoin will be central to the next phase of U.S. economic development, starting by building a strategic reserve, but the lack of details left investors unimpressed. As a result, Bitcoin failed to stage a meaningful rebound after the sharp losses of the past few weeks, as many had expected an announcement on how the U.S. might use Bitcoin to build a strategic reserve.
While we have no crystal ball on where crypto is headed in the coming months, this serves as a good reminder: Bitcoin continues to trade like any other risk asset and hasn’t enjoyed any real premium as a hedge against inflation. That likely won’t change as long as risk-off sentiment dominates the market.
Thank you for staying with us until the end. As usual, here are two interesting reads from last week:
The Department of Government Efficiency (DOGE) got its first pushback from the President late last week, with a directive to be more scalpel than sledgehammer. But what could be the full economic impact of DOGE?
provides some insightful analysis.And because sometimes the best way to weather a market storm is to step away from the screens, what better than a few research papers to keep your mind engaged? We particularly enjoyed a study on monetary policy in Brazil—worth a read.
That’s it for us this week. We wish you a great (CPI) week ahead and happy trading!
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