Hey Traders,
I was on the State of the Market show this morning with Mark. If you missed it, watch the replay here. I want to expand on what I said on air because I think we're at an inflection point.
Oil ripped 12 percent on Friday. One of the biggest single-day moves since the war started. The May crude contract jumped $12.
The S&P closed green.
This past month, that was unthinkable. Oil up, stocks down. Oil down, stocks up. One factor. One trade. Every asset on the planet moving on the same headline. I wrote about it here. That correlation drove Millennium, Citadel, and Balyasny into billions of combined losses in a single week, and their Month didn’t end any better.
Something shifted on Friday.
The Curve Is Telling You
Here's what most people missed. When crude jumped $12, it was only the front month. May is trading around $111. June is at $97. July is $88. By November you're down near $73. That's almost a $40 drop across the curve.
Normally when oil goes up, all the contracts go up. When the front month rips and the back months sell off, that's a squeeze on physical barrels. Real supply, real demand, real tightness in the spot market. The back of the curve is saying: this is temporary. The front of the curve is saying: we need oil right now and can't get enough through the strait.
The S&P read the back of the curve, not the front. That's why it closed green. The equity market is starting to look past the headline number, and read the structure underneath.
Still a Trader's Market
The correlation is cracking, but don't confuse that with "back to normal." It's not.
Average true range on the S&P is still running about 119 points a day. That's almost double what it was in December. If you convert that into an implied volatility number, you're looking at around 28. Meanwhile, the implied volatility is closer to 19. So weekly strangles are pricing less movement than the market is delivering on a daily basis. That gap between realized movement and what options are pricing is your edge right now.
And serial correlation is gone. The number of consecutive days the market moves in the same direction has collapsed. Up one day, down the next, up the next, followed by down. Yesterday's close tells you almost nothing about today's open. Combine that with larger ATRs and you get the textbook definition of a trader's market. Not a portfolio manager's market. Not a thesis market. A trader's market.
That ATR-to-implied-vol gap is the signal. When serial correlation disappears, the edge goes to whoever reads the day in front of them, not whoever has the best 30-day thesis. That's Olivia Voz. She trades close to the market every single day.
If you've been reading my stuff and wondering what that looks like in practice on a daily basis, Olivia Voz is running a three-day open house this week. Wednesday through Friday. No cost. She's been trading this exact environment and her members have been posting win after win.
Tim