US Markets Are Nearing All Time Highs, Despite The Rising Mid Term Risks.

The S&P 500 is hovering just above 6,090, positioned near critical gamma flip zones where market-maker hedging behavior can amplify volatility, yet this surface level calm belies a deeper buildup of stress across macro and structural channels. With the US fiscal trajectory in question amid a potential debt ceiling showdown and persistently large deficits, Treasury issuance is expected to surge (at the conclusion of the debt ceiling debate) into a backdrop of uneven liquidity. Geopolitical risks are also on the rise, from Middle East flashpoints to the US and China economic standoff, all intensified by a volatile global election calendar. Meanwhile, tariff risks are reemerging with Trump’s policy proposals gaining traction, raising the specter of inflationary supply shocks rather than the deflationary impulse markets had come to expect (as Powell said this week in his congressional testimony) . These factors coincide with a divergence in central bank policies globally, cracks forming in cross-asset correlations, and rising bond market fragility. The VIX curve has gotten steeper from May to June, meaning the market expects more volatility in the future even though things seem calm now. Implied volatility is rising compared to actual market moves, a sign that traders are quietly worried about big risks. Dealers are still in a stable position for now, but if the market drops, their hedging could add to the move. At the same time, the low put/call ratio shows traders are relaxed, even though other indicators like SKEW suggest more people are buying protection. All together, this points to a calm market that could turn fast if trouble hits. Lets take a deeper look. The VIX term structure is currently in contango, meaning longer dated VIX futures are priced higher than nearterm ones. This usually signals calm markets and supports short volatility trades like long SPY and short VIX. In fact, the curve is even steeper in June than it was in May, which shows the market expects more volatility in the months ahead even though things seem quiet right now. This steepness creates more "roll decay," meaning VIX futures lose value as they approach the lower spot VIX, which continues to reward short vol trades. But the steeper curve also suggests that traders are increasingly pricing in future risks, possibly surrounding the rising geopolitical risks , expectations on mid term policy shifts, or macro events later this year.

Source - CBOE, (adjusted with calculations)

At the same time, the gap between implied volatility (from VIX) and realized volatility (from SPX returns) is narrowing. Realized volatility is starting to rise, and if it moves above implied, that’s often a warning sign. It means the market has been underestimating risk, which can lead to a sudden volatility spike. So while the current structure still favors short vol strategies, the rising back end of the curve and the tightening vol spread show that the market is starting to prepare for bigger moves ahead even if they haven't hit yet.

Source - CBOE, (adjusted with calculations)

Based on the current VIX level, the market expects the S&P 500 to stay within a fairly narrow range over the next 30 days. This is shown by a bell shaped probability curve centered around 6,100, with most expected moves falling between about 5,740 and 6,460. That means traders don't see a big move up or down in the near term.

Source - CBOE, (adjusted with calculations)

This calm outlook is partly due to positive gamma exposure, meaning options dealers are positioned in a way that helps keep the market stable. When prices fall, they buy; when prices rise, they sell. That creates a “dampening” effect, keeping volatility low. However, this balance depends on the S&P 500 staying above a key level called the gamma flip, currently around 5,969. If the index drops below that level, dealer hedging could shift in the opposite direction and start adding to the move instead of calming it, leading to faster, more aggressive price swings (we covered a portion of this in our synthetic flow analysis).

So, for now, markets expect things to stay stable around 6,100. But if SPX breaks down below the gamma flip, that calm could disappear quickly. To show this , two key signals are flashing calm, but may be hiding risks under the surface. First, the CBOE equity put/call ratio (PCCE) has dropped sharply to 0.554. This means traders are buying far more calls than puts, showing confidence and very little fear of downside. In the past, when this ratio gets this low, it often signals overconfidence or complacency and becomes a contrarian warning. When everyone is leaning bullish and few are hedged, even a small drop can catch the market off guard and trigger a fast spike in volatility.

Source - TradeView

Second, the MOVE Index, which tracks volatility in the bond market, has fallen back to around 93, levels last seen in early March. This low reading suggests that bond markets are also calm, with little fear of big interest rate moves in the near term. That usually helps support equities. But historically, bond volatility tends to rise before equity volatility in times of stress. So if the MOVE index starts to rise, it often means trouble is coming and stocks could follow.

Source - TradeView

In essence, traders aren’t buying much protection in equities, and the bond market looks quiet. But if that changes, the shift could be fast and sharp. Markets may be underestimating how quickly calm can turn to chaos. A key macro event to watch, is the ongoing debate on the debt ceiling as it could potentially serve as a catalyst that flips the switch on the wider macro liquidity measures. The debate directly impacts 2 of the most important tools that affect how much cash is flowing through the financial system, these are the TGA (Treasury General Account) and the RRP (Reverse Repo Facility). Think of the TGA as the Treasury’s bank account at the Fed. When the government collects more money through taxes or issues debt without spending it right away, the TGA balance goes up, pulling cash out of the system. When the government starts spending again, the TGA balance falls, putting cash back into the market and supporting risk assets like stocks (which it is currently doing now). The RRP, on the other hand, is a place where money market funds can park excess cash overnight. When RRP balances are high, it means there’s a lot of unused liquidity sitting on the sidelines. A falling RRP balance suggests that this excess cash is starting to move into the market, which is also generally good for stocks and other risk assets (again ongoing).

Source - FRED

When the TGA has to be rebuilt at the conclusion of the debt ceiling debate the Treasury issues a wave of new debt and holds onto the cash, which pulls large amounts of money out of the banking system and tightens liquidity across markets which potentially could replicate the event we saw in 2019 where funding stresses build in repo markets or short-term credit, jumps in equity volatility as liquidity dried up and dealer gamma flipped, amplifying downside moves. The FED decided earlier on to get ahead of such an event by reducing QT runoff from $25B to $5B as well as the Treasury looking into deregulating the banking sector.

Whether its enough to offset any tightening in liquidity and credit availability remains to be seen.

The market remains in a dealer controlled, suppressed volatility regime, where positive gamma positioning and a steep VIX term structure continue to dampen large swings. This environment supports short volatility strategies and risk-on behavior, with implied volatility still trading above realized in many areas. But cracks are starting to show: the equity put/call ratio (PCCE) has dropped sharply, signaling overconfidence and light hedging, while the volatility spread is narrowing as realized vol picks up. These shifts suggest the market may be underpricing risk, and if the S&P 500 breaks below the key gamma flip level around 5,969, it could trigger a reflexive selloff fueled by dealer hedging and positioning flows.

Still, there are strong tailwinds that support a bullish outlook into year-end, including the possibility of rate cuts from the Fed as inflation trends lower and financial conditions ease. The economy continues to show resilient growth, particularly in labor markets and consumer spending, which helps reinforce earnings strength. Tariff tensions may ease, especially if trade deals or exemptions are introduced ahead of the US mid term election, reducing uncertainty for global supply chains. On the geopolitical front, while risks remain, some recent de-escalation in key hotspots (e.g, Middle East, China) has helped stabilize sentiment. And with inflation continuing to cool across both goods and services, markets are beginning to price in a soft landing scenario, one that could justify a move toward 6,400 on the S&P 500 by year-end.

In short, we’re in a regime that favors stability and upside, but it’s a narrow bridge. As long as the structure holds, the path of least resistance is up. But if any of the support beams, liquidity, positioning, sentiment crack, volatility could return quickly. It’s a market rewarding calm, but punishing complacency.