Disconnects Between Stocks, Bonds, The Dollar, and Vol Widen

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11/7/23

#Stocks –

#Macro – $SPX, #Rates, #dollar

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Today was a bizarre day; maybe it was election day, and the kids were home, or maybe it was because I slept in until 6:45 AM. I couldn’t seem to get a feel for things, and that seemed mostly because there were a few big disconnects in the market. We saw rates fall, the dollar rise, the vix fall, and stocks rally. This has not been what has been happening for some time, and this is the first time I have seen this disconnect for months.

Dollar

The dollar has been a reliable gauge for the vix and credit spreads for some time, not today, not the last two days. This is odd and suggests that either the dollar strength is due to fade, the VIX’s declines are due to reverse, or something in the relationship is breaking down.

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The dollar also tends to be a fairly reliable indicator for the equity market, and when inverted, one can see how changes in the dollar have on the S&P 500.  Of course, there are no perfect signals or trends that can be followed, and these things tend to work for only as long as they work. But the real test will come over the next day or so because either stocks are going to change course and head significantly lower, or the dollar is due to weaken by a lot.

S&P 500

Meanwhile, this area between 4,375 and 4,400 is a tough spot for the S&P 500, and with the call wall as of today still at 4,400, it is likely to remain that way. I think the main point is that the gamma squeeze of last week is over, and now that we are in positive gamma, you have seen the market stabilize and stall, while breadth has been negative on the NYSE two days in a row.  This proves the point I made last week and over the weekend.

Tomorrow, we will get the 10-year auction. Today’s 3-year auction seemed to go smoothly, and that gave rates a chance to move a bit lower. The 10-year rate keeps trading and holding the 50-day moving average. That seems like an important level heading into the auction tomorrow. I think tomorrow’s auction carries a lot of importance, much more than today’s 3-year. So if we get a solid auction, there is no reason we couldn’t see more relief on rates, with them moving down, maybe even back to 4.3%. But bad results could push the 10-year back towards the 5% level.

Whether the move down in rates will be enough to boost stocks is tough to say because the options market seems to be in control at this point, and even if we get past 4,400, there is a huge amount of gamma at 4,450 to contain it. On top of this, we have Powell giving a speech tomorrow and then speaking again along with Q&A on Thursday. The tone from a few of the Fed officials I have heard following the November FOMC seemed more hawkish than the way it was laid out by the media last week. Personally, I didn’t hear anything new at the FOMC last week, and I certainly didn’t hear anything that was beyond common sense. Some media outlets are trying to point out that Powell steered people away from the dot plots because they decay over time. Yeah, I agree they decay over time, but that seemed obvious and more like common sense.

So, if the message wasn’t well received, we will hear about it very soon.

-Mike

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