What happened to SPX the last time Unemployment Rate surprised the market?

The last significant Unemployment Rate surprise occurred on July 5 2024 when the official rate came in at 4.1% versus the expected 4.0%. This was the first time in over a year the rate exceeded the Fed's 4% threshold and triggered the Sahm Rule.

SPX reacted sharply lower that day dropping approximately 0.9% on the headline. The move accelerated over the following week as markets repriced Fed rate cut probabilities. From the July 5 close of 5561 the SPX fell to a low of 5320 by July 24 a decline of 4.3% in just 13 trading days.

VIX spiked from 12.4 to over 18 during this period. Iron condor traders who had sold 40-50 delta wings the week prior were largely unharmed if they kept wings at least 80 points wide on both sides. Those using narrower 40-50 point wings saw some tested or breached on the downside.

This event highlighted the importance of the ALVH methodology. When VIX is under 13 and unemployment surprises to the high side the market tends to price in recession risk quickly. Best practice is to reduce position size or widen wings by 20-25% in the two weeks surrounding major employment reports when VIX sits below 15.