Maybe, Maybe Not

Beware "boots on the ground"

Traders are fond of saying things like “Price pays” or “Price is the only thing that matters.” For the record, I generally agree with that sentiment. Your thesis about how the world works and how markets should behave might prove to be correct over time, but price may also bankrupt you before the stars align. Results of the holiday shortened week that ended on Thursday would suggest that the worst of the Middle East war is behind us. Equity markets around the world powered higher while bonds rallied and all of our volatility measures showed significant improvement.

The volatility term structure using the CBOE indices was lower across the board and even shows the upward slope we refer to as contango.

The term structure of the VIX futures and its relationship to spot VIX shows a stark contrast between 3/27 and 4/2. We still have a touch of backwardation from April to June, but nothing compared to the prior Friday. And spot VIX dropped more than seven points! That’s not a world record, but it’s pretty dramatic.

Looking at our “go to” chart of VIXM (mid-term VIX futures) to VIXY (short-term VIX futures), we can visualize the repair work done to both the S&P 500 (8-day EMA curling up) and the vol ratio (bullish crossover of shorter term EMAs).

These improvements are also reflected in our composite VIX Mix. There was an improvement of six points on Thursday alone, taking the gauge up to 28%. We haven’t seen that level since the Friday before the first attacks on Iran (Feb 27th). As shown in the recap at the top of the post, the Mix rallied 21 points for the week.

Regular readers will note that we’ve added something to our timeline chart of the VIX Mix. That purple line is a 10-day simple moving average that outlines the trends. We’re doing some research to tease out what these trends might tell us. For example, there’s a double bottom with a higher low on the right side of the chart. Maybe markets have factored in the impact of the war and are ready to move on. We’ll be watching.

Notwithstanding proclamations that the war is over and the resumption of some shipping traffic through the Straits of Hormuz, the Iranians somehow shot down a couple of US jet fighters and Hegseth fired the US Army’s Chief of Staff. To actually end the conflict, the President may be forced to put troops on the ground in Iran. Veteran fighters like General Randy George have actually been there and done that. He was fired for speaking truth to power. Forget the politics. Markets are unlikely to rally on the news of “boots on the ground.” Last week’s improvements can be quickly erased. We’ve talked about having a plan that allows for things to get better or get worse. Maybe you’ve already taken Jason Zweig’s advice. Whatever you do, make sure that it can be unwound easily and with minimal cost.

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