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Takeaways:
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Monitor SOFR closely tomorrow, as elevated repo rates suggest it may move above the Fed’s upper target range.
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Prepare for potential equity reversal if the end-of-day move was due to JPM collar hedging effects.
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Watch the S&P 500 Dispersion Index, as historically high readings have preceded negative market signals.
The decline in liquidity was evident today, as shown by the rise in the average repo rate, which surged to 4.31%—6 basis points above the Fed’s target range of 4.00% to 4.25%. This likely means that SOFR will be very elevated tomorrow and could also move above the 4.25% level.
This is why volumes in the reverse repo facility fell today. It suggests that excess liquidity in the marketplace may be gone. If ample liquidity were still present, the overnight funding rate would likely have traded closer to the lower bound of the Fed’s target (4%), and reverse repo volumes would have been much higher.
In terms of the stock market, the JPM collar often distorts the trading day, and there isn’t much that can be done to avoid it. While I can’t prove it, I suspect the end-of-day move we saw in the index was tied to that collar or related hedging activity. Trying to analyze it for deeper meaning, in my view, is a waste of time. If it were collar-related, the gains should be given back fairly quickly tomorrow.
The S&P 500 Dispersion Index is now at its highest level since the tariff tantrum. It could go higher, but historically, readings at these levels have not been a good sign.
See you tomorrow.
-Mike
Glossary by ChatGPT
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Basis Point (bps): A unit of measure equal to one one-hundredth of a percentage point (0.01%).
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Collar (JPM Collar): A structured options strategy, often attributed to JPMorgan’s hedging, that can influence market flows around key dates.
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Dispersion Index (S&P 500 Dispersion Index): A measure of the degree to which individual stock returns in the S&P 500 diverge from each other.
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Fed Target Range: The Federal Reserve’s set range for the federal funds rate, used as a primary tool of monetary policy.
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Overnight Funding Rate: The interest rate at which financial institutions borrow and lend funds overnight.
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Repo (Repurchase Agreement) Rate: The interest rate charged in short-term borrowing where securities are sold and later repurchased.
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Reverse Repo Facility: A Federal Reserve tool allowing institutions to park excess cash overnight in exchange for Treasuries, helping manage short-term interest rates.
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SOFR (Secured Overnight Financing Rate): A benchmark interest rate for dollar-denominated derivatives and loans, based on overnight repo transactions.
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Tariff Tantrum: A market episode in 2025 marked by volatility following U.S. tariff announcements, often cited as a stress point in equity dispersion.
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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