Regional Banks, China, Russia, and the VIX
The market environment has seen a change in character over the last week. What went from a smooth trend is now very choppy and volatile.
Let’s run through the some of the main things I’m noticing:
- VIX at 25
- Headlines matter again
- Sustained weakness in crypto
- Very strong price action from Gold
- Regional bank weakness, worst week since last year
- Renewed escalations with China after a quiet period
- Leading speculative themes in quantum and nuclear being sold
- NASDAQ and S&P500 struggling at key short-medium term moving averages
This is in addition to the market “feeling” different. That can be attributed to the seeming escalation with China, the VIX, or something else we don’t know about yet. Is it the end of the world if the market takes a breather or sees a pullback? Absolutely not. The market had a 6.5 month run of nearly no volatility and very smooth sailing., some chop would actually be normal, healthy, and likely present a great opportunity into 2026. Below is a chart of S&P500 seasonality.
You can see October is typically choppy for equities so this isn’t out of the ordinary. What happens in November and December? You can read the chart. That is my favorite time of the year to be in markets. What is out of the ordinary is the VIX being at 25 with the major indices being just a few percent off all time highs. To me, that says the market is bracing for something whether it’s an escalation with China, a potential regional bank failure, or some other macro shock that could quickly shake confidence.
I’ve seen a few people say the VIX might currently be manipulated. The VIX can’t realistically be manipulated because it’s mathematically derived from the prices of a wide basket of S&P 500 index options, both calls and puts, across multiple strikes and expirations. These options are traded by thousands of institutions globally in deep highly liquid markets, making it nearly impossible for any single player (or even a group of players) to distort prices long enough to move the VIX. Even if someone tried, arbitrage mechanisms would correct it quickly since any mispricing between options, futures, or volatility products would be instantly exploited by market makers and algorithms. The scale and transparency of these markets make sustained manipulation of the VIX effectively impossible.
In my opinion, this means one of two things. Either something very bad is about to happen or the market is massively over hedged and volatility is being overpriced relative to actual risk. If it’s the latter it usually unwinds with a sharp move higher in equities as those hedges get unwound and short term fear gets priced out. But… if it’s the former, as I said above, then there might be an issue and VIX is flashing an early warning that institutional money sees something on the horizon whether it’s a geopolitical escalation, a credit event, or stress in the banking system.
In my opinion, the most likely reason for the elevated VIX and recent choppiness is that the market might think there’s underlying stress in the banking system. I don’t think there is but let’s discuss.