This kind of price action is not very typical after a VIX spike to near all-time highs. In recent history, we’ve never seen fear subside as quickly as it did last week. As far as I’m concerned, any upside from here is an entry point for my short positions.

VIX recovery

The VIX gave us a strong reason to believe that we’d see a recovery from BOJ fears. After spiking to almost 66, it’s back below 16 in just a week’s time. We did not hold the breakout over the wedge and are seeing consistent downside. As long as this is the case, higher equity prices are possible.

SPY historical context

SPY has cut through all resistance levels from this recent pullback in a matter of nine trading days, rising over 8%. Keep in mind that the historical average year-over-year return for the S&P 500 is about 10%. We’re up 15% YTD and about 50% since January 1, 2023.

In my opinion, this kind of growth, compared to historical growth, is setting the market up for multiple years of stagnation (at best) or a strong decline (at worst).

Rate cuts and market implications

According to the FedWatch tool, the market is currently pricing in a 70% chance of a 25 basis point rate cut. This can change as we get closer to the FOMC meeting, so I recommend checking it periodically.

Since rate cuts historically precede recessions, it’s logical to assume that if the Fed is cutting rates, there are signs of decline in the economy, despite what I’ve read in recent articles. Even if the market continues to rally into next year, it seems like the rubber band is just stretching more and more.