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The S&P 500 rallied to start the day, rising about 50 to 60 basis points at its intraday high, but those gains faded as the implied volatility crush largely ran its course. As noted yesterday, the VIX 1-day closed at 13.6, and we typically see 50-60 basis-point moves on such days when volatility declines. The VIX 1-Day opened around 9 and rose throughout the session, finishing near 12. In that sense, the volatility crush was even shorter-lived than expected.
More importantly, signs of nervousness are building at the margins. The VVIX, which measures the implied volatility of the VIX, rose on the day, and the S&P 500 left-tail index also climbed. That’s significant because, on the surface, it may appear that little is happening, but underneath, volatility is building and becoming increasingly evident.
Constituent volatility, as measured by VIXEQ, remains extremely elevated relative to the VIX index, which reflects index-level volatility. The spread is still around 21.5. Historically, when the spread reaches these levels and widens, it has often preceded fairly meaningful corrections.
While things may appear calm on the surface, there is still significant change beneath. This remains a warning signal. As we move through the rest of earnings season, implied volatility on individual constituents should continue to decline, as it typically does. As that happens, the spread will likely narrow. That process could involve unwinding positioning, which may result in a sharp move to the downside. Again, none of this is new to readers of this commentary or members of the service.
In addition, some sectors and recent moves have become extremely overextended on technical grounds. The Materials sector ETF, XLB, is now showing a weekly RSI of 77 and is trading above its upper Bollinger Band on the weekly chart. Both are classic signs of an overbought condition, suggesting the sector may be stretched in the near term.
The Industrials sector ETF, XLI, is now trading above its upper Bollinger Band on the monthly chart, with an RSI of 78.3. Historically, when the sector has become this stretched, it has typically led to extended periods of consolidation.
That was the case in 2018, 2013–2014, and 2007. When momentum reaches these levels on a monthly timeframe, it generally suggests the sector may struggle to sustain further upside without first working off those overbought conditions.
The challenge is that sectors such as Industrials and Materials, along with Staples (XLP) and Energy (XLE), are largely driving the outperformance of the equal-weight S&P 500 (RSP) relative to the cap-weighted S&P 500. That dynamic helps explain why, on a day-to-day basis, the S&P 500 often looks relatively calm. The market appears to be rotating leadership—pushing one group higher while another lags—effectively balancing itself out, because the big Mag 7 names alone can no longer do that lifting.
I suspect this may be a byproduct of zero-DTE options activity and heavy daily trading in short-dated options. I don’t have hard evidence to prove that, but based on observation, it would make sense. If a large amount of positioning is concentrated in specific strikes—whether calls or puts—dealer hedging flows could influence price action around those levels.
For example, if there is significant open interest in a 6,950 call and positioning effectively pins the index near that strike, the broader market may need to rotate beneath the surface to keep the index aligned with where options are priced. That could contribute to dispersion within the index, with individual sectors moving more aggressively even while the headline index appears stable.