Market Commentary
There is Never Just One Cockroach
The post-Liberation Day market crash was hemmed in by President Trump’s 90-day tariff reprieve. While this action took the immediate doomsday scenario off the table, consumer and investor sentiment remain in PTSD mode, and confidence in American institutions and exceptionalism is shaken. Maybe even stirred.
As this is a Trumpian policy failure, only a credible Trumpian policy pivot will serve to reverse the above. In the meantime, markets await with bated breath for new data or policy headlines to reverse the information void that markets are contending with.
Instead of hanging on every word coming out of President Trumps Truth Social account, or waiting for hard economic data to turn, extracting the signal from noisy price action may be of greater use to investors and traders. Specifically, we want to parse the price action for regime state confirmation.
The preferred framework for doing this is one that focuses on volatility.
The importance of volatility as a signaling mechanism cannot be overstated: volatility impacts the strike prices on the entire universe of economic and financial transactions. It does so through the risk premium channel.
Risk assets that bop up and down in wide ranges and at higher frequencies will trade with a higher risk premium (aka, price discount). Assets that do the opposite will trade at a lower relative risk premium (aka, price premium). Think of a U.S. treasury bill (for now?) versus a bitcoin shitco SPAC sponsored by Chammath.
As an indicator of investor sentiment, volatility tends to cluster. Periods of high volatility tend to follow periods of high volatility, and periods of low volatility tend to follow periods of low volatility. Eggheads call this autocorrelation.
The shift from one state to another, i.e., low vol to high vol, requires a narrative catalyst that changes investor risk sentiment with respect to future market expectations. For example, there have been two significant narrative shifts this year.
The first was the release of DeepSeek’s AI bot which altered the perception of capex requirements for future AI applications.
The second was Trump going nuclear on tariffs and doing so in an unpredictable way.
There are two ways to approach the task of measuring investor sentiment and vibes.
Tracking the number of times the S&P500 moves by 1% (slightly over 1-standard deviation), or more, in a given time frame and looking at subsequent returns.
Looking at VIX standard deviation breakouts and comparing them to subsequent returns.
1% Clusters
There is an intuitive inverse correlation between market bipolarity and returns. Periods with concentrated 1% days tend to produce negative returns and vice versa. This is because markets like certainty and consistency from the government, policy makers, business conditions, and in the general outlook.