Stocks Rip Higher On Volatility Melt Following The Fed Meeting
2022.05.05 13:30
Stocks ripped higher following the FOMC meeting, which had no surprises, resulting in a big implied volatility melt. The VIX fell yesterday by more than 4 points to finish around 25. That melting helped lift the S&P 500 by 3% and close at 4,300. The NASDAQ 100 QQQ ETF did much better, rising the day higher by 3.4% to close around $330.
The trick here is figuring out what happens next; I know it is easy to get excited, but I find it hard for this rally to have any meaningful legs with the VIX now trading around 25. The VIX could still go lower to maybe 21, but the Vanna effects will significantly diminish. On top of that, with the BLS Job report on Friday and a CPI report next week, I think it is more likely than not that more hedges will get put in place, and the VIX will start to push higher again.
The VIX is already trading lower than where it was following the March FOMC meeting, and with the headline risk, it seems more likely that the floor in the VIX will be much higher.
VIX Index Daily Chart
S&P 500
Unfortunately, the S&P was unable to clear 4,300 yesterday, which may or may not matter. But the afternoon Rocketship higher created a very unstable pattern, and we have seen these patterns plenty of times lately, and the gap at 4,300 is now filled. The pattern is easy to see with those two vertical rally legs off Monday’s low. I would expect the S&P 500 to give back all of these gains and return to that 4,070 level. It doesn’t have to happen today, but I would expect that to happen over time.
S&P 500 Index Chart
Additionally, in the December and January FOMC cycle, the market pulled back after an initial rally following the Fed. So a pullback the next couple of days is certainly possible, and as I have been saying, this is not the same cycle as the march FOMC cycle without the tailwind of an options expiration or a quarter rebalancing.
SPDR S&P 500 ETF Chart
But ultimately, let’s not lose sight of what the Fed is trying to do, which is tighten financial conditions. We know that tighter financial conditions lead to weaker stocks. So while there is the risk that the S&P 500 could even rally back to 4,400, anything more, I think, is very doubtful.
NFCI Index Chart
