Warning signs from the options market started Monday when the ORATS early warning service alerted subscribers of the beginnings of trouble for the market.
By near the close Wednesday, when we take our final snapshot of the market 14 minutes before the close, things had deteriorated.
One of the signals we track is short term contango. Contango is the relationship where the shorter term maturities have lower implied volatilities than the longer term ones. This is the normal state of affairs for the options market happening 72.5% of the days since 2007.
Sometimes, when contango flips to backwardation (you guessed it, when the short term IVs are greater than the long term), it is usually already bad or going to get bad for the market.
As in the graph from 2017 on, the red circles show falling contango (rising backwardation) and falling markets.
ORATS has a other interesting signals, like our forward volatility signal. Unfortunately for the bulls, that turned negative recently too.
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