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The weekend news of the US entering the war against Iran has significantly impacted oil prices. As of now, the IG Weekend Oil CFD is trading up almost 8%, positioning WTI crude oil around $80. While this isn’t an unprecedented price for oil in recent years, it’s considerably higher than its mid-May level when it was trading below $60. If this consistent increase holds, it will likely contribute to inflationary pressures.
A slight silver lining is that energy’s weighting in the market is currently around 6.4%, a decrease from 9.2% in June 2022. However, if oil prices continue to rise and remain elevated, this weighting will increase. Therefore, falling prices offer the dual benefit of lower costs and a reduced market weight, whereas rising prices hit twice as hard.
For the most part, 10-year rates have been tracking with oil prices. Consequently, one might expect that higher oil prices would lead to higher rates, and the longer oil remains elevated (or continues to rise), the more likely it is that rates will also stay elevated (or increase further).”
This situation will, of course, complicate an already intricate picture, especially with the deadline for the tariff pause approaching on July 9. According to reports, trade talks with Japan and the EU appear to be progressing slowly.
Additionally, whether intentionally or not, Howard Lutnick, when criticizing Jay Powell in an X post on Friday, reminded everyone that currently, there are no tariffs on personal computers. However, “yet” is the key word, as he stated that “Semiconductors and computer tariffs come out after the Commerce Department finishes its analysis.“
Based on CFD data, NASDAQ 100 futures are likely to open approximately 1.3% lower tonight. While not a massive drop, it’s significant as it brings the futures very close to a key support level at 21,500. A breach of this level could trigger a further decline to around 20,900, potentially even filling a gap from May 12 at 20,100.
Currently, ‘rising wedges’ are a prevalent pattern across multiple stock indexes. These are bearish technical patterns, and therefore, a downward movement, as we’ve discussed, appears to be indicated by the charts.
We are now trading post-options expiration (OpEx), which means the ‘pinning effect’ that often keeps prices anchored around certain strike prices, due to market makers’ hedging activities, will no longer be a dominant force. This suggests that market volatility is likely to expand. With the market already in a ‘negative gamma’ state, where market makers sell into falling prices and buy into rising prices to hedge their positions, these flows will amplify the market’s existing directional momentum.
(Barcharts)
My proxies for 1-month, 2-month, 3-month, and ‘Magnificent Seven’ (Mag 7) realized correlations are all significantly higher than implied correlations, which suggests that implied correlations are likely to rise. While realized volatility is currently quite low, it wouldn’t take much to start pushing it higher, and this, in turn, will drive implied volatility higher.
With compelling reasons to decline this week, as observed this morning, the market is poised for a potential downward move. Based on current indicators, this could easily extend to a much more substantial fall
-Mike
TERMS AND DEFINITIONS BY GEMINI
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CFD (Contract for Difference): A financial derivative that allows traders to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies, and treasuries. When trading CFDs, you don’t actually own the underlying asset; instead, you’re agreeing to exchange the difference in price from the time the contract is opened until it is closed.
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Gamma (in options trading): A second-order derivative of an option’s price, measuring the rate of change of delta with respect to the underlying asset’s price. In simpler terms, it indicates how much an option’s delta is expected to move for every one-point change in the underlying asset’s price. A high gamma means delta will change rapidly with small price movements, while low gamma means delta will change more slowly.
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Negative Gamma: A market state, particularly relevant to options market makers, where their collective options positions lead them to sell the underlying asset as its price falls and buy as its price rises, in order to maintain a delta-neutral hedge. This behavior amplifies existing price trends, leading to increased volatility. When the market is falling, negative gamma positions require dealers to sell more, exacerbating the downward move.
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OpEx (Options Expiration): The specific date and time when options contracts cease to be valid. For monthly options, this typically occurs on the third Friday of the month. Leading up to OpEx, hedging activities by market makers can sometimes “pin” the price of the underlying asset around a strike price with high open interest. After OpEx, this pinning effect disappears, potentially leading to increased volatility.
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Pinning Effect: A phenomenon in options markets, most noticeable around options expiration, where the price of the underlying asset tends to gravitate towards a strike price where there is a large amount of open interest (i.e., many options contracts are outstanding). This is often attributed to market makers adjusting their hedges to manage their exposure as options approach expiration.
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Realized Correlations: This refers to the historical correlation calculated between the price movements of different assets (e.g., how closely stocks and oil have moved together over a past period).
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Implied Correlations: These are derived from options prices and reflect the market’s expectation of how closely different assets will move together in the future. If implied correlations are lower than realized correlations, it suggests that options traders are pricing in less co-movement between assets than has historically occurred, which might imply a future adjustment where implied correlations rise to meet realized levels.
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Rising Wedge: A bearish technical chart pattern that forms when price action is confined between two converging, upward-sloping trend lines. The support line is steeper than the resistance line. It suggests that buying momentum is weakening and often precedes a downward reversal in price.
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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