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This morning, I was all set to write about the stock market’s dislike for this weekend’s tariff announcement.Instead, the drama is playing out a bit like a Hallmark movie, thanks to the “will they, won’t they” moment that occurred when Mexico’s tariffs were delayed by a month. That was certainly a boon to those who bought this morning’s dip, but brought another reminder that volatility continues to lurk.Ahead of a media appearance this afternoon, I started my usual notes to the producer with the following comments, which proved to be immediately prescient:I’m waiting to see if either:
[Honestly – point #2 is literally what I wrote at the time]Since the S&P 500 (SPX) was at its lows when the news broke that tariffs on Mexico would be delayed by a month after a productive conversation between Presidents Trump and Sheinbaum, it is unlikely that everyone who might have wanted to buy the dip had a chance to do so, but someone certainly had been. It should be quite obvious on the graph below when the news broke:
SPX Intraday 1-Minute Candles
Source: Interactive BrokersThe tariff delay should come as welcome news not only for traders, but for football fans as well. Regardless of whether you root for the Eagles, Chiefs, or neither, this weekend’s Super Bowl is a peak weekend for beer and avocado consumption (it’s not a watch party without guacamole), with Mexico being a key supplier of both.We can also see the divergent responses in popular ETFs that track the key countries affected by tariffs. In the chart below, note the jump in EWW, the iShares MSCI Mexico ETF, compared to EWC, its Canadian counterpart, and FXI, the iShares China Large-Cap ETF. EWW quickly jumped back towards the highest levels seen in a week, but while FXI and EWC remain well below those levels, despite bouncing off their morning lows:
1-Week, EWW (red/green 5-minute candles), EWX (blue line), FXI (purple line)
Source: Interactive Brokers
There has been a definite shift in the market’s mood just since this morning, but it is clear that we are not yet feeling that an “all-clear” has been given. One sign of that, besides the obvious fact that most equity market measures remain lower on the day, is that the Cboe Volatility Index (VIX) has not given back all today’s gains. It’s had a bit of a ride, trading below 15 just prior to Friday’s confirmation that tariffs were likely to be implemented withing days, and above 20 this morning,the current 18.5 is near the higher of that range and above the highest levels seen in the last week. It is apparent that traders are showing more concern that tariffs could offer a bit more volatility than we had recently been expecting:
VIX, 1-Week, 5-Minute Candles
Source: Interactive Brokers
Traders should be aware of a “tell” that has affected VIX in recent months. We have previously noted the relationship between index volatility and correlation between the names in the index (a primer is here). One convenient measure of correlation is provided by the Cboe 1-Month Implied Correlation Index (COR1M), which they describe as:
The index measure isolates the impact of correlation changes on the index option implied volatility and provides a trading signal for volatility dispersion (correlation).
The exchange compiles a suite of correlation indices of different tenors, such as 3-months, 1-year, etc., but I prefer to focus on COR1M since it uses the same timeframe as VIX.The graph below shows that COR1M and VIX broadly follow each other, as we can see in the graph below, but notice the placement of the arrows:
6-Months, VIX (red/green daily candles), COR1M (blue line)
Source: Interactive BrokersWe placed the arrows to show times when short-term lows in COR1M were not confirmed by a similar dip in VIX.In this small sample, higher VIX readings followed each time.I wish I could say that this is statistically significant – it’s not, with only 4 readings in this sample, but it bears watching the next time these two indices drift lower.More By This Author:Underappreciating Fiscal Policy
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