Pressure Drop

Is it you?

The announcement of a ceasefire in the Middle East has futures markets rocketing higher this morning. Made me think of Robert Palmer’s cover of a Toots and the Maytals song - Pressure Drop.

When it drops, you’re gonna feel it, how it’s been doing you wrong….

Markets won’t open for another couple of hours, but the impact appears to be pretty dramatic. Here’s a peek at the VIX and the VIX futures term structure. We’ve grown accustomed to seeing spot VIX north of the futures with backwardation as was the case at yesterday’s close. That has completely flipped overnight, with spot VIX dropping almost six points and the futures sporting a bit of contango (although the structure remains on the flat side with less than two points from low to high).

If markets follow through on this bullish take, that will bode well for the VIX Mix and repair the bit of damage that took place yesterday. The Mix retreated a few points as most volatility measures weakened.

The bearish reading stretched our streak of “no bull” readings to 58 trading days. The only good news on the chart below is that the 10-day moving average continues to move higher and will get a further boost today unless someone decides to cancel the ceasefire. Let’s hope that doesn’t happen.

Today looks to be a good reminder that volatility works in both directions. A move like the one we’re seeing this morning is some combination of short covering and FOMO buying. Both of those tend to be short-term reactions to news. Let’s see how the day settles out before jumping to any conclusions about the durability of this initial move. I’ll be back at HQ later this morning and will check in with everyone over on the X.

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