For quite some time, my friend Steve Sears and I have been trying to popularize the term “Socially Acceptable Volatility”. So far, we’ve been unable to make it happen, but it describes a day like today perfectly.
As I write this, the S&P 500 (SPX) is up about 40 points, or about 0.75%. When we were down by this amount yesterday, I received numerous questions from people wondering why. Today, not a single inquiry about why we’re up.
That’s the concept behind “SocAccVol” (a portmanteau that DEFINITELY won’t “happen”). In investors’ minds, markets are supposed to go up. In fact, over time they usually do. Thus, it is typical for concerns to rise when markets sink but similarly sized upward moves are taken in stride. That is also why we typically see volatility measures like VIX rise on down days and fall even on relatively large up days. As we noted earlier this week, who wants to buy umbrellas when the sun is shining?
ES June Futures, 2-Days, 5-Minute Candles[i]
![ES June Futures, 2-Days, 5-Minute Candles[i]](https://ibkrcampusdev.wpengine.com/wp-content/uploads/sites/3/2024/05/Picture1-21-1100x680.png)
Source: Interactive Brokers – Past performance is not indicative of future results
Today we have two opposing forces at work, and it is clear who is winning for now. First is “who wants to go home with a long position over a long weekend?” The answer to that so far is “most traders.” More often than not, SPX is higher on the Friday before Memorial Day, so this shouldn’t be a problem.
The second force is an amalgam of several. It includes “buy the dip,” “don’t short a dull tape,” and “it can be easier to ramp the market on Friday.” The first two are rather obvious. There are typically few catalysts to move a market on the Friday before a long weekend. Today’s economic numbers weren’t enough to move a somnolent bond market. Higher bond yields were a negative catalyst yesterday; today they are essentially unchanged.
As for the Friday catalyst, it is a phenomenon that we noticed during the post-Covid rally. Each Friday, over 600 weekly options expire. That essentially means that instead of the usual handful of so-called “0DTE” options, we have expiring options in all the leading stocks, ETFs and indices. Exuberant traders attempting to exploit quiet markets are hoping that those options can become a slingshot propelling the market higher.
Yesterday’s major head fake caught many of us – including me – by surprise. As I wrote around noon EDT:
Quite frankly, if you told me that NVDA would be up over 10% by midday while the S&P 500 (SPX) is up only slightly, I would have thought that impossible.
As we now know, that modest midday advance, after a solid opening rally, turned into a broad based selloff a few hours later. We’ll learn soon enough whether today’s bout of socially acceptable volatility persists.
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[i] The horizontal line is as close as I could get to Wednesday’s 5328.00 close)
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