Rising Rates Put Stocks On Roller Coaster Ride October 17, 2023

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#Stocks – $TSLA, $NFLX

#Macro – $SPX, #Rates, #oil

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It was a busy day for stocks, as rates exploded to the upside following the hot retail sales report. This led to a sharp decline in the morning for stocks, only for the declines to be erased and the index to turn positive midday. However, those gains were later returned, with the S&P 500 finishing flat.

The big gamma level is at 4,400, which will be significant resistance for the S&P 500 the rest of this week, as well as two big events coming with a 20-year Treasury auction tomorrow at 1 PM ET and then Powell speaking on Thursday at noon. So there is a pretty good chance we see implied volatility move up into the two events, and with resistance at 4,400 and implied volatility on the rise, it could lead to that drop to lower, erasing the move higher off the lows on October 6. Wave C equals 78.6% of wave A of larger C, so today’s high at 4,392 works for a potential top.

The 10-year rose sharply today and made a new cycle closing high; it didn’t take long for it to come and test the highs of the past 2-weeks. If it did break out of a bull flag, then I think it is possible for the 10-year to push higher to around 5.25%. The economy and inflation rates support higher yields at this point.

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For now, oil has been playing nice, but I’m not sure how much longer that will be the case, especially if a bull flag has formed in oil; if so, then oil is probably heading back over $90 on WTI.

Tomorrow we will get into the heart of earnings season with results from Tesla. The market is not expecting a big move. An at-the-money long straddle for expiration on Friday suggests the stock moves about 5.7% the rest of the week. What is noticeably different going into this quarter’s report versus prior quarters is that implied volatility is much lower, and the IV for puts is trading higher than the calls. That could change tomorrow some, but that is not what was seen in July. This may suggest we don’t see a big move in the stock tomorrow.

The opposite is true for Netflix, with implied volatility ramped up and near some of the extremes seen in prior results. However, this time the PUTS carry the higher implied volatility, versus the calls in July. Additionally, an at-the-money long-straddle for Friday’s expiration suggests the stock moves about 8.25% the rest of the week.

There is also a large amount of put gamma, around $350, which could act to support the stock. So, as long as the results aren’t some disaster, it seems possible for the shares to rally if implied volatility falls sharply, causing dealers to unwind put hedges. However, bad results, that push the shares below $350 could lead to a significant decline.


Charts used with the permission of Bloomberg Finance L.P. 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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