They say ev’ry man needs protection
They say ev’ry man must fall
Yet I swear I see my reflection
Some place so high above this wall

Bob Dylan – I Shall Be Released

On July 28 of 1794, Maximilien Robespierre was executed by guillotine in Paris during the Reign of Terror. Robespierre was one of the most influential leaders of the Jacobins during the French Revolution. The French were inspired by the American Revolution and other Enlightenment principles. His death arguably brought The Terror to an end and ushered in a new regime as well as a more peaceful and democratic France.

One could make the (cautious) argument that a new “volatility regime” is being ushered in of late. Like the American and French Revolutions, new regimes are only apparent in hindsight. While single dates (or data points) can be important, the broad landscape takes time to shift.

There are 252 trading days during a typical calendar year. We highlighted the “rule of thumb” in a previous Inside Volatility piece for dissecting relative levels in the Cboe Volatility Index® (the VIX® Index) as a function of the square root of time. (252 trading days in a year. The square root of that time frame is = 16.)

VIX Index ~16 implies 1% daily SPX® moves
VIX Index ~32 implies 2% daily SPX moves
VIX Index ~48 implies 3% daily SPX moves
VIX Index ~64 implies 4% daily SPX moves

The high-water mark for the VIX Index in March on a closing basis was just over 80, which meant 1-month SPX options were pricing based on expected 5% daily moves. Current VIX Index levels, around 24, means 1-month SPX options are pricing expected daily moves of 1.5%.

Below is a visual for daily SPX changes in percentage terms going back to the beginning of June. The average daily change (absolute value) has been 1.09%. This data is skewed higher as a result of the nearly 6% decline on June 11. The average SPX daily move since the last significant move lower is 0.93%. There hasn’t been a +/-1.5% daily move in SPX since July 6, but the decline of 1.23% on July 23 was the largest drop since June 26.
Source: Cboe Global Markets

Here’s a five-year chart showing the VIX Index (closing) as well as the 252-day simple moving average. Calling attention to the 1-year moving average, the VIX Index has fallen right to that moving average (24.76). It may be worth watching as a potential inflection point going forward.

Source: LiveVol Pro

Shifting to a broad market analysis, risk assets like silver have broken out to multi-year highs. Copper, which market pundits argue has a “PhD in Economics,” is flirting with $3.00/lb., which is right where it was trading in February and March of this year. Copper demand is driven in no small part by China and infrastructure projects that require raw materials. Lumber recently traded to the highest level in two years and has catapulted about 125% off the March lows.

In the currency markets, many traders consider the Euro/Yen cross to be a valuable sentiment indicator. The U.S. Dollar and Japanese Yen are often considered “safe haven” assets. Both have been weaker in recent weeks. Conversely, the perceived riskier currencies, like the Euro, Aussie Dollar, Canadian Dollar, Brazilian Real, and others have been climbing.

Here’s a look at the Euro/Yen cross over the past year from TradingView.


Source: Trading View

On the equity front, big tech continues to outperform. The NDX® is up about 24% on the year whereas the S&P 500® is roughly unchanged. The DJIA® is off by roughly 6% and the small-cap Russell 2000 is lower by nearly 11% in 2020.

Source: LiveVol Pro

The Nasdaq 100 is well above the old all-time highs from February but has come off the July 20 levels. Perhaps further weakness could be considered a canary in the coalmine. The SPX has broken out of a multi-month range, above the 3250 level. The S&P 500 is about 3.5% below its all-time highs (3393.52)

Short term (10-day) realized volatility for the SPX Index has fallen to the lowest levels (11.89%) since February 21. The 10-day historical measure declined to just over 12% in early June before the Unemployment report on the 5th of the month. The stunning BLS report catalyzed a two-session rally of nearly 4% in the S&P 500, which pushed realized volatility levels higher and serves as an excellent reminder that volatility is non-directional.

Prior to that, S&P 500 volatility was last this muted in mid/late February as the Index made new all-time highs. Shortly thereafter, concerns about the spread and potential impact of the coronavirus rattled the markets and brought about a sharp correction.

International equity markets, most notably the Shanghai Composite Stock Market Index (China) have been very strong in recent weeks. China’s Index rallied nearly 17% over a two-week period between late June and early July.

Every coin has two sides, and the flip side to the “breakout” narrative for equities and breakdown for macro vol could be the weakness in breadth and concentration of strength. We mentioned the exceptional performance on the part of big tech. Last week Morningstar analyst, John Rekenthaler highlighted the historic levels of concentration in the S&P 500.

The 10 largest constituent holdings in the S&P 500 Index now account for more than 26% of the overall. The only other comparable period was the summer of 2000 which may not augur well for bulls. Rekenthaler concludes:

“The parallels are incomplete. While S&P 500 concentration is higher today, other signs of speculation were greater in the past. The gap in valuations between the glamor stocks and small-value securities was much larger 20 years ago than it is today. Also higher was retail investors’ fervor. At the peak of the New Era, several readers sent death threats to pessimistic Morningstar researchers. This year, thankfully, has not resuscitated that trend.

My take: This column’s findings add another tally to small-value stocks’ ledger. They appear to be the soundest bet among U.S. stocks over the next three to five years. However, the evidence is not yet overwhelming.”

With respect to breadth, Dana Lyons of J. Lyons Fund Management called attention to the events of last Monday (July 20). In short, what occurred was unusual. The divergence between the NDX and RUT℠ as well as the SPX closing up more than 0.55% (and within 12% of 52-week high) while the NYSE closed down on the day is an atypical confluence. To be fair, single data points aren’t sufficient to alter an investment thesis, but the historical data points to a few such instances.

This has occurred “at quite inauspicious times in the market—including near cyclical peaks in 1973, 1980, 2000, and 2008.”

Market breadth indicates the number of stocks participating in a move. It’s a look underneath the hood, so to speak. Breadth figures may reveal the degree of underlying strength or weakness in an index. Some technical traders use this data in an effort to identify potential inflection points.



Time will tell whether we’re in the midst of a breakout in equities and breakdown in forward volatility expectations. The potential bull trap scenario given the unusual concentration in the FAANG securities and diminishing breadth may signal a cautious undercurrent. Keeping an eye on the VIX Index for further “normalization” or perhaps a return of more whipsaw action speaks to its role as a critical global barometer.

As of July 28 we are just under 100 calendar days until the next US election. Will a further degradation in the US/China relations derail weeks of “risk-on” trading? Will the surge in COVID-19 cases and the steadily increasing global death toll unravel the coordinated efforts of central bankers and politicians to backstop the global economy?

“Every day is a new day. It is better to be lucky. But I would rather be exact. Then when luck comes you are ready.”
Ernest Hemingway, The Old Man and the Sea

*All data as of July 23 close
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