📈  Chart of the Week 4/6/2025

By Michael Allison, CFA

Normally, each week I choose a chart (or two) which I find interesting enough to write about. I typically explain what I think the chart represents and offer my views on the subject.

However this week, I will be taking a “picture is worth 1000 words” approach, with a number of Charts of the Week which should largely speak for themselves.

Because this past week was…well…a very unusual week.

The gray line in the above Chart shows that in recent weeks, investor sentiment had become very poor, largely driven by uncertainty surrounding DOGE and tariff talk.

But…

Investors didn’t seem to be positioned in a way that was consistent with that poor sentiment, as indicated by the red line.

That gap was bound to close—history shows that it always has.

Following President Trump’s Wednesday announcement of tariffs the Administration plans to impose on various countries, the S&P 500 fell 4% the next day. This was a statistically significant event—a 4 standard deviation event—one that is exceedingly rare.

This happened in the context of implied volatility that was much more muted than would be expected. The CBOE Volatility Index (“VIX”)—the so-called “fear gauge” rose to a level that, while elevated, wasn’t especially alarming.

In fact, the equity market has never fallen by 4% in a single day with the VIX under 30. What gives? Where was the volatility response we would expect to such a significant one-day return?

Source: Bloomberg

What a difference a day makes. On Friday the 4th, the weakness accelerated with the S&P 500 falling another 6%. That’s a more than 10% decline in two days. Holy cow!

The above chart shows something interesting about this particular episode. Going into the two day slide, implied volatility was…normal. This is unique when compared to other two-day corrections, all of which have evidenced very elevated volatility at the outset.

But by the end of the day on Friday, the VIX had spiked to 45—historically a level that has suggested panic or capitulation on the part of investors.

Is the worst over? Given the fluidity of current events, who’s to say?

As presented in the Chart above, history would suggest that after market moves like the one we just witnessed, opportunities for good returns could very well present themselves.

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