Subscribe to The Free Market Chronicle and join the 2,708 subscribers getting it for FREE!
1/10/24
#Stocks –
#Macro – $SPX, $NDX, #Implied Volatility, $VIX
Mike’s Reading The Markets Macro Subscription Service on Seeking Alpha
- RTM: The Grind Of Volatility Selling
- RTM: The Next Couple Of Weeks Will Be Very Important For Markets
- Replay For Zoom Session On 1/5/24
The S&P 500 finished the day higher by about 60 bps, while the S&P 500 equal weight ETF finished the day higher by just 17 bps. It again shows how the indexes are diverging and returning to their ways of mid-summer and December.
The movement in this week’s markets has led me to conclude that we are seeing the dispersion trade we saw over the summer, with sellers of implied on the S&P 500, hedging risk with underlying baskets of stocks in the index. We can see that the IV of an at-the-money 1-month option for all 7 stocks that make up the mag 7 has stayed flat while the IV of the S&P 500 has moved lower. Meta and Nvidia have both seen their IVs actually rise.
This has sent the 1-month correlation index to fall to just 12 and is at the very low end of the range at this point, and levels that typically come with market tops. While this index doesn’t tell us when the reversal in the market will come, it gives us a sense of where we are in the process. Again, we used this same index in July to identify the turning point as well.
Additionally, we have seen the VVIX fall to around 77 today, and at levels typically seen at the low end of the range going back several years. It means that buying puts is really cheap.
So, we have implied volatility at the index levels falling, while the IV for the top seven names is not falling. Great! 😉
Today, we saw the 1-week 50 delta option for the S&P 500 go higher. It’s not by much, but it’s higher, probably because next week is VIX opex, and tomorrow is CPI. Once implied volatility rises on the index level, the entire trade will fall apart just like it did in July.
As a result, we also saw the S&P 500 rally to around 4,790, filling the gap from last week’s decline, and has now hit up against that resistance level that goes back to January 2022, as noted by the purple dotted line. The question is whether the index can power higher through that resistance level. Based on the chart alone, one could argue that the index tried to make a new high today but failed and was rejected at resistance.
The NASDAQ 100 also rallied today and managed to fill the gap from earlier this year, and it also stopped right at that resistance level. So, this would be the perfect spot if the rally wants to end at these levels.
The other issue is that the 10-year rate is trying to break free of a consolidation phase in a symmetrical triangle and potentially points to going higher. Given the relationship between stocks and bonds, if rates move higher from current levels, the highs seen today in the S&P 500 will likely hold.
We are seeing the 10-year minus the 2-year also showing signs of potentially moving higher and sitting right at resistance. It is clear that there is an uptrend present in the spread, and it is clear there is firm resistance around -32 bps, which could end up sending the spread to around -15 bps.
Anyway, tomorrow is CPI today, so it is anyone’s guess what will happen.
-Mike
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.