Stocks managed to rally yesterday, with the S&P 500 up almost 75 bps. With a large portion driven by the usual suspects. The rally in stocks continues as credit spreads narrow and financial conditions ease. This has allowed implied volatility to be sold and stocks to rally. The trade mechanics are similar to what we saw in June and July.
Interestingly, the 1-month implied correlation index rose yesterday and, over the last few weeks, has fallen back to what has historically, over the past five years, been the lower bound of this index, and typically, this area of 17 to 19 marks short-term tops in the stock market. Some of those tops have been minor and, in some cases, large. It is merely meant to be an indicator to tell us we are in a range that could support a move lower in stock prices.
It may be rising because the 1-month implied volatility of the top 7 stocks in the index is falling along with that of the S&P 500. So, the correlation in implied volatility for stocks is going in the same direction as the S&P 500, which means they are more correlated to the index.
Additionally, the VIX is back to the low end of the range, dropping below 14 yesterday and trading down to around 13.5.
The CDX high yield index is also back to the low end of its range between 400 and 410. Over the past 2-years, this level has supported the index and marked tops in the S&P 500. Now, realize this CDX high yield index could also be viewed as a measure of financial conditions, and when the index is falling, it means conditions are easing.
So, the drop below 400 in periods like 2020 and 2021 happened during periods of easy monetary policy, while periods that saw spikes were during periods of stress or tighter policy. Since we are in a period where policy is supposed to be sufficiently restrictive, I think the floor in financial conditions is higher than it is during periods of easy policy. This means that the CDX index could hold around this 400 level and start to move higher again. A break of 400 would be bullish for stocks.
Now, today we get the Fed minutes, and based on the last three times we have heard Powell, it seems likely to me we will be reading about the move higher in long-term rates, the need to make sure policy remains higher for longer, and discussion around where the neutral rate in the economy is.
If I had to guess, we would likely see these separate, but the three related indicators mentioned above hold the key levels and do not break the lower bound. But now that I am pointing it out and talking about it openly, I realize the odds moved against me somewhat. 
Nvidia Earnings Take Center Stage
Nvidia (NASDAQ:NVDA) will report results today, and the call implied volatility is certainly higher than the put implied volatility, suggesting that there is a lot of demand to own Nvidia calls into the earnings release. All of this implied volatility will drop today and will continue to drop following the release of the results, and that will mean that the value of both the puts and the calls that expire this Friday will decay quickly.
That will make for an interesting dynamic for Nvidia, which probably means it will take better-than-expected results and guidance to push shares up following results. Because with the IV weighted towards the calls, a vol crush will result in market makers being over-hedged on the calls and not the puts, which means there will need to be a lot of buyers overriding the dynamic of market makers unwinding hedges.