The recent decline in implied volatility, as indicated by the VIX, suggests that the stock market rally may be losing momentum. Following the inauguration of President Trump and the announcement of his executive orders, which were less disruptive than anticipated, equities surged while the VIX fell to around 15. This drop in volatility typically signals reduced uncertainty, fostering a supportive environment for stock price appreciation. However, with the S&P 500 advancing to approximately 6,100, traders have begun hedging their gains or adopting more bearish positions through call selling and put buying, indicating a potential pause in the rally.
Despite the impressive ~6% rise in equities since last Monday's lows, the lack of positive gamma and the absence of significant catalysts, such as the upcoming FOMC meeting and PCE inflation data, suggest limited further upside potential. Elevated realized volatility is also acting as a floor for how much further implied volatility can fall, reducing the vanna flows that have supported the current rally. In this context, the market may need to take a breather, as option markets signal caution amid ongoing headline risks in the new political landscape.
As of 13:41 on January 22, the VIX stands at 15.23, slightly up from its last close of 15.06, with an intraday high of 15.29. This reflects the market's cautious stance as traders navigate the evolving political and economic environment.