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It was a relatively subdued trading session, with the indexes finishing near flat. At this point, this has become the typical pattern we’ve seen over the past couple of weeks: big rallies on Monday mornings, as implied volatility falls sharply, followed by consolidation, and then a retracement.
For now, the S&P 500 has stalled at the 78.6% retracement level, near 6,850. It will be interesting to see whether the recent pattern continues and the index moves lower, potentially refilling the gap down at 6,720 before the week is over.
In the meantime, we saw implied correlations rise today and the S&P 500 dispersion index decline. This caused the spread between the dispersion index and the three-month implied correlations index to narrow and potentially break below an uptrend that began in mid-April. This could be an important development because, historically, the S&P 500 tends to move in the same direction as this spread. At the moment, the two are diverging slightly, suggesting that if a real move lower is emerging in the relationship between dispersion and correlations, the S&P 500 should follow this spread lower.
There will be another Treasury settlement tomorrow, totalling about $23 billion. That will likely create additional liquidity pressures. We already saw some of that today, with repo activity trading at elevated levels and overnight funding rates moving higher. The GC rate averaged around 4% according to DTCC. Given all of this, SOFR rates are likely to push higher on Wednesday morning.
Additionally, we saw high-yield credit spreads move higher today, along with investment-grade spreads. Most notably, Oracle’s five-year credit default swap widened to 87.1 on the bid side, up from 82.4 previously. This now marks the highest level for Oracle’s CDS spread since early 2023.
The USD/JPY rose sharply today, pushing the yen through resistance at 154. It could now be on its way to 156, and potentially even higher.
This has happened despite the interest rate differential continuing to contract and easing dollar funding costs. It’s all a bit of a mystery to me at this point.
Finally, the equity financing cost for the S&P 500 total return index in January has surged to 113 bps, well above the December contract at 80.5 bps. Financing costs are expected to decline in February and March. It’s surprising because last year these costs peaked in the December contract, not the January contract, so it’s unclear why the pattern is different this year.
-Mike
Glossary by ChatGPT
CDS (Credit Default Swap) – A financial derivative that provides insurance against the default of a borrower.
Dispersion Index – A measure of how differently individual stocks within an index are moving relative to one another.
GC Rate (General Collateral Rate) – The standard interest rate for secured borrowing in the repo market using high-quality collateral.
Implied Correlation – A measure derived from options pricing that reflects expected co-movement among index components.
Implied Volatility – The market’s forecast of a security’s or index’s expected price fluctuation derived from options pricing.
Repo Activity – Short-term borrowing transactions where securities are sold and later repurchased, typically used for funding needs.
SOFR (Secured Overnight Financing Rate) – A benchmark interest rate based on overnight borrowing collateralized by U.S. Treasury securities.
Treasury Settlement – The scheduled payment and delivery process for newly issued U.S. Treasury securities.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
Subscribe to receive this FREE daily commentary directly in your email
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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