Markets were nicely hedged going into Jay Powell’s speech at the Jackson Hole confab yesterday anticipating the possibility that the Fed Chair would use his last major speech to poke his Presidential nemesis. Then there was the mystery surrounding a “big announcement from the White House” that was scheduled for noon Eastern - shortly after Powell. But the message from JPow was even-handed and heard as dovish. Kaboom! Market rocketed higher and Trump didn’t come on until about 2 pm when he announced with great fanfare that the final draw for the 2026 FIFA World Cup would take place at the Kennedy Center. Conspiracy theorists immediately painted this as a pivot from the President’s intent to use the time slot to bash the Fed.
Anyway, it ain’t no use to sit and wonder why. If you don’t know by now, don’t think twice, it’s all right. Wise words from Nobel Laureate Bob Dylan. But the best rendition of his famous song is this one from Susan Tedeschi from her third studio album, Wait For Me. But if you’d like to take it to church, then try this version from Stone The Crows with Maggie Bell doing her very best Janis Joplin.
Jackson Hole had been set up as a binary event - a known unknown that was expected to move the markets in either direction depending on the message. The S&P 500 dripped lower every day starting last Friday while the VIX nudged higher, both signals that investors were reducing risk going into the speech. As shown below, the VIX Mix stepped lower and moved from bullish to neutral on Wednesday.
It all bounced back yesterday afternoon. The VIX Mix finished the week at 73%, just a touch below its highs of the week before. 11 of the 17 components are bullish, not quite back to the 14 we saw on the 14th.
Two pictures of volatility term structure deliver the same message. First is this picture of the CBOE indices. The red dots were Thursday as markets prepped for the Powell speech. The overlapping greens show that yesterday finished lower than the recent lows we reached 10 days ago. This suggests that the storm has passed without doing any damage.
The VIX futures term structure shows significant improvement week over week as well. Contango remains healthy and there is a large premium between spot VIX and the front month (Sep) contract. That 2.8 point spread is at the 95th percentile of values going back to the 2004 introduction of VIX futures. We’ve commented before that contango plus a wide spread represents a tailwind for short vol positioning. We’ve also tried to be clear that these conditions can change quickly.
Looking at the past week, Friday’s rally generally made up for the slippage earlier in the week. Interesting to note that international equities continue to perform well. As with equities, all of the weekly move in the major volatility ETPs came on Friday after we got the “all clear” signal.
Monday will begin to tell us how much of Friday’s action was due to short covering, relief, FOMO, etc. We also need to get Nvidia earnings behind us on Wednesday after market’s close. But right now the bulls are in charge until further notice.
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