Forward Note - 2025/04/20
Mean-reversion.
If you put it in the context of the last month, this was a fairly quiet week. The S&P 500 managed to close flat, up a modest 0.25%, while the Nasdaq gave back half a percentage point. The VIX settled just below the 30 handle at 29.64, heading into the long Easter weekend.
Things kicked off on a positive note, with the market initially cheering the news—albeit quickly walking it back—that electronics and phones would be exempt from tariffs for at least the next 30 days... maybe two months? Who knows exactly at that point.
And while President Trump was busy patting himself on the back for delivering the “best week in history” for the stock market (sic), we learned late Tuesday night that NVDA would face stricter curbs on its ability to sell to China.
Specifically, the H20 chip—custom-built for the Chinese market to comply with U.S. export restrictions—was now under tighter scrutiny. NVDA’s CEO said he was blindsided, claiming he had a deal with President Trump. The impact? Substantial: a projected $5.5 billion revenue hit, potentially more if the U.S. administration cranks up the pressure during its investigation into how key pieces of technology still made it into Chinese hands, enabling the development of Deep Seek.
That news hit hard. The Nasdaq dropped over 4% on Wednesday, and the S&P 500 shed 2.5%. NVDA’s 30-day implied volatility spiked from 51 to 64—but beyond that, there wasn’t much panic. Certainly nothing close to the fireworks we saw at the start of the month.
There are a few ways to frame this, but the key takeaway is that the element of surprise is fading. The market has digested the tariff narrative—you’ll need meaningful escalation to catch it offside. Case in point? The 6-point spike in QQQ on the day of the announcement was quickly unwound as we drifted into the long weekend.
Realized volatility—and its composition—is also cooling off.
Quick reminder: semi-variance is incredibly useful for pinpointing where the volatility is coming from. The light blue line captures vol from positive returns; the orange one from negative returns. And since... well, you guessed it, the December FOMC meeting, it’s been mostly downside doing the heavy lifting.
For now, realized volatility looks to have topped out in the short term. That’s supported not just by the spread between upside and downside realized vol, but also by the slope at the front of the realized vol curve.
We’re back to flat—quite the change from the deep backwardation we saw just ten days ago.
Does that mean the storm has passed and we’re gliding back to normal, especially with VIX slipping below 30 on Thursday? Wouldn’t bank on it. There’s still plenty of dry tinder out there, and it wouldn’t take much to reignite the fire President Trump started with his tariff war.
So—where are the real risks?
The other big story this week may have flown under the radar compared to NVDA, but it’s no less important. Powell finally broke his silence, warning that the administration’s policies could make it difficult to uphold the Fed’s dual mandate of maximum employment and low inflation—just hours after Trump reminded everyone that he could fire the Fed Chair if he really wanted to.
At a time when unpredictability is high—and let’s face it, Powell has been a key stabilizing force over the past five years—it’s worth watching where the next wave of turbulence might come from.
Because while markets were relatively calm this week and things are easing off a bit, we’re still sitting at VIX 30. Yes, the term structure is much flatter—but it’s hardly a sign of conviction about the month ahead. Flat is better than severely backwardated, sure. But flat still means: we don’t know. And in truth, it likely understates the potential for turbulence.
In other words, if you’re still sitting on chunky short vol positions—whether because you kept dry powder for the post spike period or because you hodl—you might want to trim a bit.
From a pure VRP perspective, options are still cheap. But until we get real clarity on the U.S.–China relationship—and on the actual impact of tariffs on the domestic economy—we wouldn’t bet on VIX settling comfortably below 30 for any sustained stretch.
Tides can turn quickly—we’ll give you that. If the U.S. economy proves once again hyper-resilient and Trump ends up winning his bet that economic warfare triggers a domestic boom, don’t expect the market to ignore it. Just like in October 2022, the hardest part will be not getting married to a scenario. Even if you’re convinced the economy is circling the drain—if it’s not, fund managers will do what they do best: pivot fast, drop their expensive insurances, buy hard, and forget the April “incident” as long as the headlines aren’t terrible. That, in our view, is the key condition for VIX to meaningfully come down.
Finally, if prices remain relatively relaxed and implied vol doesn’t respond meaningfully to realized vol, it’s also because the market isn’t pricing in any near-term acceleration in tensions. You’ll get headlines—like Wednesday’s—but you’ll need something more unexpected to truly catch vol off guard: worse-than-expected data on growth, jobs, or inflation, or a complete lack of resolution on the tariff front.
It’s tempting to get comfortable again—Europe and Japan seem close to deals, after all. But that’s also what the media was saying about peace between Russia and Ukraine back in February. Two months later, we’re still waiting.
In other news
After holding the line through Q1, META is now swimming in red—down nearly 20% year to date. That’s quite the reversal for a name that was still leading the Mag 7 pack just a month ago, proudly flashing green while others stumbled.
That changed fast during April’s market rout. And the latest twist in the monopoly probe isn’t doing investor sentiment any favors. Prosecutors have surfaced some damning emails from Zuckerberg himself, where he essentially admits he had to buy WhatsApp and Instagram to keep his grip on the social media market. We also learned he once considered spinning off Instagram—but, of course, it never happened. Is this the moment one of the Big Tech titans finally loses a jewel? Maybe. But like the debt ceiling, this debate resurfaces on rotation: if it’s not Google and MSFT in the spotlight, it’s Meta or AMZN.
Then again—would it really be wise for the U.S. government to weaken one of its tech mastodons at a time when the race with China has never been more cutthroat?
And with that in mind, we’ll wait for the ultimate signal - Does Nancy fancy the stock?
Thanks for sticking with us until the end. As usual, here are a couple of thought-provoking reads from last week:
Feeling optimistic after this week? Here’s a healthy dose of pessimicynicism from
—a sobering look at just how tangled things are for the U.S. right now, whether it’s the dollar, the Fed, or the economy itself. Don’t lose sleep over it though—if economics were a hard science, we’d have found our Einstein by now.And yet another long read on AI—this time from
. With OpenAI going full throttle since the Deep Seek shuffle, releasing model after model over the last few weeks, one uncomfortable question looms: are we, as a society, even remotely ready for OpenAI’s pivot from non-profit to for-profit—with everything that shift entails?
That’s it from us this week. Wishing you a great start to the new one—and as always, happy trading.
Ksander
Contact at info@sharpetwo.com.
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