VIX Jumps 8% as Markets Bounce: Is This Rally Built to Last?
Indices posted their best day of the week on Friday, but breadth is thin, yields are spiking, and the Strait of Hormuz is basically a parking lot
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Let's set the scene. The S&P 500 dropped four straight sessions, falling from 7,718 all the way to 7,591, then snapped back 0.86% on September 11 to close at 7,656. The Dow and Nasdaq both joined the party, each popping roughly 0.96% on the same day. On the surface, that looks like a relief rally. One layer down, it looks more like a dead cat that took a very convincing hop.
Here is the thing nobody in the green-candle celebration is talking about: the VIX ripped 8.38% to 17.84 just one session before that bounce, capping a four-day climb from 15.3. That is the options market quietly screaming that something is wrong while the index scoreboard pretends everything is fine. Add in the fact that the 10-year Treasury yield surged 2.48% in a single day to nearly touch 4.95%, and you have a setup where stocks go up, bonds sell off, and volatility also goes up. That trifecta does not usually end with everyone getting a trophy.
The macro backdrop reads like a stress test no one signed up to take. Oil is trading above $100 a barrel, Brent briefly touched $110, and US diesel prices crossed $6 a gallon after Saudi Arabia shut down its East-West pipeline following drone strikes. Hormuz shipping traffic has fallen to single digits. The ECB hiked rates anyway, citing fresh inflation fears tied directly to the conflict. Inflation is already running at 3.4% against wage growth of just 3.1%, meaning real wages are negative again. Consumers are reaching for credit cards and buy-now-pay-later apps to cover groceries. Restaurant chains with 55-year histories are closing their doors.
Investors Business Daily's Mike Webster flagged something worth noting: the equal-weight S&P 500 ETF (RSP) is stuck below its 21-day moving average and has been for several sessions, a signal Webster reads as a confirmed downtrend. Meanwhile SPY is finding support at its 50-day. That divergence means a handful of large-cap names are doing all the heavy lifting, and the average stock is quietly getting wrecked. Broad market health? Not great.
The ChartGuys are watching the FOMC meeting next week with the market pricing in an 87% probability of a rate hike. Paradoxically, if the Fed blinks and holds, that surprise could trigger more volatility, not less. Either way, the bond market at 4.95% is already doing the Fed's job for it, and the equity market has not fully priced that in yet.
Friday's bounce was real. So is everything that caused the four days before it, and none of that went away over the weekend.