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Stocks fell on Wednesday, but the S&P 500 declined by only 50 basis points. However, the S&P 500 equal-weight ETF RSP rose by nearly 90 bps, which is notable dispersion today. This was noted in the Dispersion index, which rose to 37.6, and is again reaching the upper end of its historical range. With earnings season winding down, I expect market dispersion to fade and correlations to rise more steadily.
The dispersion index, minus the 3-month implied correlation index spread, has risen today. Again, this spread should be positioned to contract over the next couple of weeks as earnings season winds down and these dispersion trades unwind.
One reason we may be seeing so much strength in Walmart and the “staples” is that implied volatility has been rising, as it normally would heading into earnings season, but this year, IV appears to be heading much higher than in previous quarters. Walmart doesn’t report results until February 19, and most retailers report earnings later in the season, so it is quite possible that the reason we have seen so much strength in the XLP isn’t that or a rotation, but rather the same dispersion trade we saw pre-tech earnings.
Rates rose today by around 2 bps on the 30-year to 4.92, so here we go again. Testing the upper end of resistance, will it break out? Who knows. Rates have every reason to rise for weeks, yet they don’t; they are frozen in time. The 30-year could easily be over 5% at this point, yet we still wait. The QRA today continues to hint at increasing issues on the long end, but it has not yet occurred.
The QRA noted that the TGA is expected to exceed $1 trillion around tax season, representing a $150 billion increase from current levels. That’s a lot of liquidity coming out of the market, and the Fed’s T-bills will just dilute that, not offset it, based on my rough math. Then, Warsh will come in May, and then I have no idea what will happen with the balance sheet. Liquidity is likely to remain tight for some time longer.
I guess we can see what tomorrow brings.
-Mike
Glossary by ChatGPT
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Dispersion Index – A measure of how widely individual stock returns differ from each other within an index.
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Equal-Weight ETF – An exchange-traded fund that assigns the same weight to each constituent rather than weighting by market capitalization.
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Implied Correlation – A market-derived estimate of how closely assets are expected to move together in the future.
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Implied Volatility (IV) – The market’s expectation of future price volatility, derived from option prices.
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QRA (Quarterly Refunding Announcement) – A U.S. Treasury report outlining borrowing needs and issuance plans.
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TGA (Treasury General Account) – The U.S. Treasury’s cash balance held at the Federal Reserve, which affects system liquidity.
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.
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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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