Complacency Is Back… Right On Cue

Markets are floating at the highs, vol has been crushed, and positioning is leaning the same way again. Nothing looks broken — and that’s exactly the problem.

Under the surface, things are getting a bit too clean. Cross-asset signals are starting to diverge, vol is pressing into its floor, and the market is behaving like risk doesn’t exist. This isn’t a call for a reversal… but it’s typically where the easy part is behind you and the asymmetry flips.

Hedges are cheap again, this is when you want them on.

Here again

SPX is pressing against the upper trend line that’s been in place since last autumn. These are frustrating setups, markets stay overbought, yet offer very little short-term direction. Aside from yesterday’s push higher, SPX has essentially gone nowhere over the past two weeks.

Source: LSEG Workspace

Disturbing gap

The gap between SPX and inverse MOVE has widened on a very short-term basis. We lack an immediate catalyst, but given how tightly these two have tracked over time, this is the kind of divergence that keeps us on alert.

Source: LSEG Workspace

Natural floor

People tend to forget that volatility is mean-reverting and typically has a kind of “natural floor.” VIX is approaching those levels. There may still be a bit more downside, but from here, it’s the upside convexity in VIX that matters.

Source: LSEG Workspace

Hated puts

Put/call ratio has imploded again as markets have squeezed higher. You don't buy protection when you must, you buy it when you can.

Source: Tradingview

A month

The chart shows how the VIX term structure has shifted over the past month. The entire curve has moved lower, with the front end seeing the most aggressive compression, reinforcing how little near-term risk is being priced.

Short-dated hedges are starting to look attractive here.

Source: Vixcentral

Equity vs bond fear

The latest bid in bond vol has opened up a short-term gap versus VIX. Not a major dislocation, but another small crack in an otherwise very “clean” setup.

Source: LSEG Workspace

Downside aversion

Skew has been resetting lower for weeks and the SDEX has traded lower on just a few occasions this year. Squeezing markets and imploding skew tells you a lot about the psychology of the current market.

Downside protection is out of fashion, making simple downside puts attractive as a short-term hedge.

Source: LSEG Workspace

So far, so good

VIX seasonality has tracked remarkably well so far this year, both the spike higher and the reset lower have followed the 20-year pattern almost perfectly. From here, the path is less clear, but expecting materially lower VIX from these levels feels complacent.

Source: Equity Clock

Time to hedge

Tech leadership remains highly concentrated, with just ten names driving ~75% of SPX’s ~12% rally since late March, while mutual funds remain structurally underweight. At the same time, the “new 60/40” — a 50/50 semis/energy barbell, is up ~37% YTD with a ~5.3 Sharpe and only ~4% drawdown, far outperforming the broader index.

From here, chasing gets harder, hedging gets cheaper. With vol still compressed, convexity looks attractive. VIX call wings offer a clean way to protect against any unwind, according to McElligott.

Chart shows the VIX May 20/30 call spread, max 10x. Yes, it is a short-term structure, but that's the point of such a hedge.

You don’t need a catalyst, you need asymmetry. And right now, it’s in vol.