It was strange, with stocks gapping lower and grinding higher all day. It was hard to say precisely what the driver was, but by day’s end, I can take an educated guess and run down what I think may have happened.
The signs that something was weird about today’s trading session started early. The 1-month implied correlation index started to go down, which isn’t supposed to happen when stocks fall. The 1-month implied correlation should be falling when the S&P 500 is rising, not falling when the S&P 500 is falling. It was the first sign of the day that the move lower wasn’t meant to last.
Additionally, the put wall today was at 5,500; when the index hit 5,490 today, there was no place for it to go. My guess is that puts started to get closed out, driving implied volatility lower. Then, to make matters worse, 0 DTE traders got trapped and their puts were closed out too. Plus, the fact that the JPM Collar was being rolled out probably created other background noise.
As we have discussed many times, market-on-close imbalances begin to build around 2 PM ET, with the final tally released at 3:50 PM. Today, being quarter end, it is not surprising that there was nearly $7 billion to buy on the closing cross, which is a massive sum.
Based on my mild observation in the social media realm, I can only imagine that many investors think today marks some capitulatory moment. If it was, it didn’t have that feel to me, at least the classic markers of such were absent.
The VIX spiking to 24.8 didn’t scream of fear, and the VIX to VVIX ratio at 0.22 didn’t look scary.
No one will know for sure, but I could imagine that if the end-of-quarter activity drove today’s gains, the rally likely won’t last and, more importantly, could be given back pretty fast.