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It was another low-volume day of trading on the S&P 500 futures, with fewer than 1 million contracts traded. The positive, of course, is that the index remains above the 10-day exponential moving average, and as long as that level holds, it’s difficult to become too negative on the market. Each time the futures have tested that moving average, they have managed to bounce off it.
Tomorrow is OPEX, so the pinning effects at 6,300 will end. This means the index will be able to move much more freely, either upward or downward. Most of the gamma should expire at the opening, with the remainder expiring at the close.
The only issue with this market—aside from being massively overvalued and about ten other problems =O—is that we’re now entering earnings season with realized volatility levels extremely low. It won’t take much to push realized volatility higher. Essentially, the S&P 500 can’t move more than 50 basis points per day in either direction without lifting 10-day realized volatility, which is exactly why it edged fractionally higher today.
The other issue at hand is that implied correlations have either bottomed or are very close to bottoming. While nothing in life is guaranteed, when the 1-month implied correlation bottomed in July 2023 and 2024, it marked a turning point in the stock market. This signal is particularly strong when the bottom coincides with earnings season, primarily due to the unwind of implied volatility dispersion.
That’s because implied volatility for individual stocks in the S&P 500 rises heading into earnings, then crashes afterward. So, when implied volatility for the stocks in the index is rising while volatility for the S&P 500 is falling, it pushes implied correlations lower.
Once earnings season has passed, the trade is essentially over because the 1-month implied volatility of individual stocks begins to trade more closely with the 1-month implied volatility of the index again. This pushes the 1-month implied correlation higher, moving it from an inverse relationship (near -1) back toward a positive relationship (near +1). The initial trade is accomplished by buying implied volatility on individual stocks and shorting implied volatility on the index. Therefore, when the trade is unwound, the trader sells the stock implied volatility and buys back the index implied volatility.
In the meantime, inflation expectations continue to rise, with the 5-year CPI swap breaking out of a nearly 2-year-long base and rising to 2.64%. That’s the highest the swap has traded since the spring of 2023. From a technical analysis standpoint, you could say the CPI swap has broken out of an inverted head-and-shoulders pattern.
I hate to be the bearer of bad news, but generally speaking, when the 5-year CPI swap trades higher, the 10-year Treasury rate tends to rise along with it.
Anyway, that’s all the free information for now. If you enjoy this type of content you can find more in my subscription service, Navigating The Market, where I post daily write-ups like these along with detailed videos.
-Mike
Terms By ChatGPT
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OPEX: Options Expiration Day, a specific day when equity options contracts expire, often causing market volatility and price movements due to hedging and options unwinding.
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Gamma: The sensitivity of an option’s delta to the underlying price movement; high gamma often leads to increased volatility, especially around expiration.
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Implied Correlation: A measure derived from options pricing, indicating how stocks within an index are expected to move relative to each other. A lower implied correlation suggests stocks are expected to move more independently.
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Realized Volatility: Historical volatility, measuring the actual observed volatility of a stock or index based on past price movements.
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Implied Volatility Dispersion: A trading strategy involving differences in implied volatility between individual stocks and their underlying index.
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CPI Swap: A derivative contract used by traders to speculate on or hedge against future inflation; higher rates typically signal expectations of rising inflation.
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Inverted Head-and-Shoulders Pattern: A technical chart formation indicating a potential bullish reversal, characterized by three lows, with the middle one (the head) lower than the two surrounding ones (the shoulders).
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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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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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