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Not a great day in the stock market, even though the S&P 500 finished the day up about 25 basis points. Most of those gains were driven by NVIDIA, which rose sharply by nearly 5% after a series of company announcements lifted the stock. However, the RSP — the equal-weight S&P 500 — was actually down almost 90 basis points. There were also about 700 more decliners than advancers on the New York Stock Exchange, highlighting once again how concentrated this market has become in just a handful of names — and how deceiving that can be at times.
Either that, or we have reached a point where liquidity is so limited that you have to sell off the entire index to lift its biggest component.
This pushed the S&P 500 Dispersion Index to 38.8, taking it back to its level before the October 10 sell-off and near its recent highs.
Tomorrow, of course, we’ll have the FOMC meeting at 2 p.m., where we’ll learn whether the Fed decides to halt quantitative tightening. Excessive pressures have continued to build in the overnight funding market, with funding rates moving higher today — the average repo rate at DTCC rose to 4.32%, returning to levels last seen in the middle of the month. It probably means that SOFR will rise again when the NY Fed releases the data at 8 AM. The Fed is also widely expected to cut rates tomorrow.
One should also keep an eye on the VIX 1-Day tomorrow. Given that it’s a Fed meeting, it’s likely to rise. Typically, when the VIX 1-Day increases ahead of a Fed meeting, it tends to fall during or shortly after the meeting. That means there’s a good chance that tomorrow—likely once the press conference begins—we’ll see an implied volatility crush, which could lift the S&P 500 higher regardless of the Fed’s decisions or announcements, as long as implied volatility rises enough beforehand. We’ve seen several examples of this recently, as noted in yesterday’s write-up, with multiple implied volatility crushes occurring on Monday mornings. This same dynamic could potentially play out again tomorrow.
Speaking of rising implied volatility, today’s nearly 5% surge in NVIDIA came with a sharp spike in implied volatility on the options — a move typically associated with gamma squeezes and driven more by options trading than by any fundamental developments. While today’s headlines likely pointed to company-related news serving as a trigger, it’s clear that the move, both today and over the past few days, has been fueled primarily by call buying and speculative activity.
Of course, Softbank makes the squeeze in Nvidia look tame. I have never had the privilege of trading options professionally in Japan, so I have no idea how market dynamics work there or whether they are similar to those here in the US.
But if it looks familiar, that’s because we saw something just recently in Gold, and we know how that’s going….
-Mike
Glossary by ChatGPT
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Advancers/Decliners: The number of stocks that rose or fell in price on a given trading day.
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Basis Points (bps): A unit equal to 0.01%, commonly used to describe changes in interest rates or percentages.
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Call Buying: The purchase of call options, typically expressing a bullish view that the underlying asset’s price will rise.
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DTCC (Depository Trust & Clearing Corporation): A U.S. financial services company providing clearing and settlement services for securities transactions.
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Equal-Weight S&P 500 (RSP): An ETF that assigns equal weighting to each S&P 500 component, offering a measure of performance less dominated by large-cap stocks.
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FOMC (Federal Open Market Committee): The branch of the Federal Reserve responsible for setting U.S. monetary policy, including interest rates and balance sheet actions.
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Gamma Squeeze: A rapid rise in a stock’s price driven by options market dynamics, where dealers hedge their exposure by buying the underlying stock as call options gain value.
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Implied Volatility (IV): A measure of expected future volatility derived from options prices.
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Implied Volatility Crush: A sudden drop in implied volatility following a major event, often leading to declining options prices.
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Quantitative Tightening (QT): A monetary policy process in which a central bank reduces the size of its balance sheet, typically by allowing assets to mature without reinvestment.
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Repo Rate: The interest rate charged on repurchase agreements, where securities are sold with an agreement to repurchase them later; an indicator of short-term funding conditions.
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SOFR (Secured Overnight Financing Rate): A benchmark interest rate for dollar-denominated loans and derivatives, reflecting overnight borrowing costs collateralized by Treasury securities.
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S&P 500 Dispersion Index: A measure of performance variance among S&P 500 components, indicating how concentrated or broad market movements are.
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VIX 1-Day: A short-term volatility index measuring expected market volatility over a one-day horizon, derived from S&P 500 options.
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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