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Stocks rallied on Monday, which wasn’t much of a surprise, as noted over the weekend. Implied volatility levels were very elevated on the VIX 1-Day, and we’ve seen this play out several times in recent weeks—high levels of implied volatility collapse on Monday, fueling a rally. While the rally was a bit stronger than I expected, it still fit that pattern. At this point, implied volatility appears to have mostly reset, suggesting the market could stabilize on Tuesday, if not trade lower.
Despite the S&P 500’s strength, the Equal Weight Index significantly underperformed, rising just 40 basis points on the day—a much weaker showing than the overall index. Most of the gains in the S&P 500 market-cap-weighted in were driven by Broadcom.
Tuesday will mark the first of a few settlement dates over the next 5 to 6 trading sessions. Tomorrow is expected to see a settlement-related liquidity drain of about $14 billion, which isn’t a large amount. The larger drains will come on Friday and next Monday. More importantly, signs of strain are already emerging in the overnight funding market. Today, the average repo rate at the DTCC rose to 3.99%—just below the 4% threshold—up from 3.93% on Friday, signaling tightening funding conditions. Additionally, with the reverse repo facility seeing minimal usage today, it suggests that excess liquidity in the marketplace has largely been absorbed. That, in turn, implies we could see renewed downward pressure on stock prices as these Treasury settlements unfold over the coming sessions, starting tomorrow.
-Mike
Glossary by ChatGPT
Basis Points — A unit equal to one-hundredth of a percentage point used to measure changes in financial rates.
Equal Weight Index — An index in which each constituent stock carries the same weighting regardless of market capitalization.
Implied Volatility — The market’s expectation of future price fluctuations as reflected in options pricing.
Market-Cap-Weighted Index — An index weighted according to the market capitalization of each constituent, giving larger companies more influence.
Overnight Funding Market — The market where financial institutions borrow and lend short-term funds, typically for one day.
Repo Rate — The interest rate at which securities are sold and repurchased in the repurchase agreement market.
Reverse Repo Facility — A Federal Reserve tool that absorbs liquidity by allowing eligible counterparties to lend cash to the Fed overnight in exchange for securities.
Settlement Date — The date on which a securities transaction is finalized and payment and asset transfers occur.
Treasury Settlements — The process of finalizing purchases of newly issued U.S. Treasury securities, which can temporarily drain liquidity from the financial system.
VIX 1-Day — A short-term volatility index measuring expected S&P 500 volatility over the next trading day.
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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