Inside Markets — Near-Term Risk

Long equity positioning across discretionary investor groups is just slightly above neutral, while positioning in the systematic community (CTAs/vol-targeting) looks nearly full. Volatility targeting funds often use realized or implied volatility (VIX) as a simple buy/sell trigger. On Friday, the VIX closed just below the 22 level we use to define elevated volatility. To put this in context, the VIX closed above 30 immediately after the April 2 Liberation Day tariff announcements, reached a peak of 57 three days later and sustained closing levels above 22 until May 12. That spike in volatility caused broad, systematic de-grossing and ~11% downside in the SPX. While Friday’s sell off lacked the characteristics of a classic volatility shock, systematic de-grossing remains a key near-term risk. In our view, an official cancellation of the Trump/Xi meeting would be a near-term event capable of kicking off a volatility shock and de-grossing episode. While that seems unlikely, we expect an elevated volatility environment will persist until November 1, when no deal would trigger a material pullback.