Are We Dealing With Market Complacency?
Yes, and prepare for a pullback.
SPY one-month implied volatility and SPY one-month realized volatility have come together, each at roughly 21.16%.
SPY One-Month Implied vs. One-Month Realized Volatility
Perhaps one key conclusion I draw from this is that market complacency has finally set in! Of course, this is simply my opinion.
Some key factors supporting my conclusion:
1. Implied volatility has basically traded sideways since mid-September.
2. Realized volatility has been steadily increasing since mid-September.
3. Current implied volatility is roughly in line with what it was in mid- to late-September, during which time SPY realized volatility was hovering in the low teens.
I guess all three of these factors are in fact one single factor; no pun intended, but they "come together" so to speak.
This dramatic reversal in SPY implied volatility -- combined with the steadily increasing trend in SPY realized volatility -- combined with some key market catalysts heading into year-end (holiday sales, November payrolls in early December, and some others) lead me to believe that the market is indeed very complacent right now and set for a pullback.
I don't anticipate the SPY to trade higher than my year-end target on 110.38.
Also, to all the fixed-income traders out there, enjoy the Parade on Fifth Avenue.
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