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 Market Recap & Forward Signal: Why Caution Was Warranted

Last post a few days ago, I flagged concerns about a fragile market structure, excessive optimism, and the disconnect between price levels and underlying macro signals. This week, we’ve seen that caution validated.

Over the past few days:

• The S&P 500 has slipped a couple of percent off recent highs

• VIX has surged by a couple of big points

• WIX (volatility-of-volatility) has remained elevated — a consistent red flag in my models

These shifts confirm that the risks I highlighted — namely policy uncertainty, recession underpricing, and rate cut wishcasting — are starting to register in the tape. However, the news cycle remains tightly manicured, and technical forces have continued to prop the market up. There’s no major economic data tomorrow, which could make for a quieter session — barring surprise headlines.

Structural Risk Remains

Looking ahead, my read remains cautious:

• Policy paralysis isn’t resolved — Washington remains tangled in optics

• Recession risk still isn’t priced in — earnings optimism is disconnected from yield curve reality

• Rate cuts are unlikely — the Fed has no incentive to ease unless something breaks

• Meanwhile, technical drivers are doing most of the heavy lifting — not fundamentals

I continue to view the broader index as overextended, and vulnerable to significant downside — but the catalyst will need to be news-based, and may take time to emerge.

 

Trade View (May 22, 2025)

Despite the cautious outlook, the current moment offers tactical opportunity, based on clean signals and the absence of major scheduled events.

Trade Setup:

• Long S&P 500 June Futures (ESM25)

• Entry: Around 5857 (EOD price May 22)

• Plan: Hold through the session, flatten by market close

• Rationale: VIX and WIX now reflect sensible risk levels, no major macro events due

• Short VIX June Futures (VX M25)

• Entry: Around 20.64

• Thesis: Volatility premium is now overstated short-term; likely mean reversion ahead