Signal Du Jour - long/short us indices

Is VIX 20 high? Or is it low?

As the world holds its breath to see how the conflict between Israel and Iran will evolve — and hopefully not take a nuclear route — markets have remained steady. No deep dive yet on the rising expectations of US involvement, and no rally either… after all, war, more often than not, is good for business?

Many market observers point to the June quarterly expiration to explain the recent lack of volatility. And while there is some truth to that, we are not convinced we will see a big return of realized volatility on Monday as the new options and futures cycle begins. Powell sounded a touch more dovish than in past meetings, noting that conditions were met for potentially two rate cuts before year-end — effectively removing much of the market’s concern.

The next earnings cycle will start in about three weeks, yet nothing points to catastrophic earnings. But more importantly, it is the way the market has been shrugging off every single piece of bad news since the start of the trade war that is most astonishing. The premium for uncertainty has melted like butter under the summer sun — so what comes next, with VIX hovering around 20? Is this low? Is this high? It is hard to say who is wrong or right — which is why today, we will stay neutral and consider a long/short opportunity in US equities.

Let us take a look.

The context

While we will not complain about the return of variance risk premium in US equities, it has not exactly been a promenade in the park. After the start of the tariff war, implied volatility was crushed just as fast as realized volatility — leaving few opportunities for options sellers. The other side of the coin? All you needed was to be long.

Things have been a little rockier for the Russell, still down -5% year-to-date. The rest of the major US equities have been flatlining, waiting for further clarity on the state of the economy… before moving higher, perhaps?

As we noted earlier, realized volatility almost vanished overnight as policymakers hinted at de-escalation with China — and it has gradually returned to more normal levels over the past month.

The difficulty for many retail traders will be to ignore the big mushrooms in the middle of this chart — they hold very little predictive power for what is to come in the next few weeks. In fact, it is far more likely we enter a phase similar to post-August/September 2024, when markets were waiting for a major resolution (economic policy, elections, and geopolitics), rather than a rewind of Q2 2025.

But who knows?

Certainly not us. And since we see valid arguments for implied vol moving in either direction at this stage, we will instead focus on designing a long/short vol position between SPY and DIA.