The stock market started the day higher, but by the end of the day, it had given back most of its gains, with the S&P 500 finishing down about 19 basis points. We started to see some signs of expanding volatility.
The VIX one-day, typically closer to 20 the day before a jobs report, managed to creep up to 11.16 today—a three-point gain. I would have expected a much bigger move in the VIX one day ahead of a major jobs report like this. Historically, as I’ve written and discussed, it’s been closer to 20 since around the August report.
It’s surprising that the markets don’t seem to be pricing in much risk ahead of such a significant jobs report tomorrow. This likely means that while we might see some volatility compression following the results, it’s unlikely to be substantial. However, it’s worth noting that the VIX index finished the day flat at around 13.5, while the VVIX—which measures the volatility of the VIX—rose for the second day in a row, closing just below 87.
This is at the low end of its range.
Looking at the S&P 500 chart, the index appears to be compressing further. Volatility is tightening, which is evident in the rising wedge pattern we’ve been tracking for months. You can see the formation of a secondary rising wedge pattern. The relative strength index (RSI) also approaches 70, underscoring this compression.
We’re getting closer to a point where implied volatility could expand significantly. You can already see this reflected in the VIX, the VVIX, and realized volatility. Today, 5- and 10-day realized volatility rose slightly, with the 10-day closing at 5.6, up from a recent low of 4.7.
However, 20- and 30-day realized volatility continues to compress, with 20-day at 7.8 and 30-day at 12. It’s becoming harder for realized volatility to fall further because it would take even smaller moves in the S&P 500 to push it lower.
Implied correlations are also at the low end of the range. The one-month implied correlation index dropped another 54 basis points to 10.25, close to the historic low of 10. It could go lower, as it did in July 2024 when it hit 2 or 3, but 10 is generally considered the lower bound.
This suggests we could see a rapid and significant expansion in volatility soon. You can observe it in the S&P’s compression and across various layers of volatility—both implied and realized.
As for tomorrow’s jobs report, it’s becoming critical due to its unpredictability. Analysts expect 220,000 new jobs, an unchanged unemployment rate of 4.1%, a decline in wage growth to 0.3% from 0.4% month-over-month, and a year-over-year rate of 3.9%, down from 4%. One interesting point outside the ADP data earlier this week, which showed rising wages in November, is the NFIB (National Federation of Independent (LON:IOG) Business) data released today. It indicated that the small business compensation index also increased in November.
Given this, the headline number could surprise, and the wage growth figures will be worth watching closely. Once the numbers are released, we’ll see how things settle, but it seems unlikely that volatility won’t continue to expand. This is something to monitor closely, as it tends to gain momentum once it starts.