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Stocks stalled on December 2nd, with the S&P 500 ending the day essentially unchanged, rising just 25 basis points. The index appears to be stuck between 6,850 and 6,800, and at this point, we’re simply waiting for a clear sense of direction.
Looking at the futures, the pattern is a bit clearer. Unfortunately, it has been an unreliable setup lately because it has played out in both bullish and bearish scenarios. What we’re seeing now is another one of these diamond-type patterns forming in the S&P 500 futures, with something similar also appearing in the cash market. We’ve had big rallies and several unfilled gaps recently—even in the futures—which is unusual and suggests the market may begin to fill some of those gaps.
Liquidity conditions have tightened enough to make that plausible, and we’ve also seen a fair amount of volatility across other liquidity gauges. So it wouldn’t be surprising if we broke support at the 6,800 level in both the futures and the cash market and began to fill some of the lower gaps, such as around 6,780 and potentially down toward 6,725 on the futures. That’s where things stand at the moment when I look across the futures, the cash market, and the broader S&P 500.
With the VIX 1-Day closing around 10.5, I just don’t think there’s enough volatility left to be sold in the marketplace to allow the index to break out and move higher. In fact, heading into a week filled with economic data and with a Fed meeting coming next week, it seems more likely than not that implied volatility will begin to rise. And as it does, that should result in stock prices moving lower.
Additionally, VIX options appear to be positioned in a way that keeps the index sticky around 16. Below that level, delta values flatten out, which means the hedging dynamics that normally push the VIX around are no longer present. As a result, those mechanical forces are likely to fade, keeping volatility pinned and putting a lid on the S&P 500.
(https://optioncharts.io/options/$VIX)
Today was a settlement day, and, more importantly, it was a net paydown of about $11 billion, which, in theory, should add liquidity back into the system. This helped general collateral rates fall to 4.03%, which should mean that SOFR drops tomorrow morning sharply from the 4.12% reported today. With another net paydown of $7 billion coming on Thursday, overnight funding pressures should continue to ease — the only question is by how much.
Additionally, we saw Treasury volumes rise today at DTCC, and one working theory I am still sorting through is that when Treasury repo volume increases, the availability of equity repo tends to fall. When equity repo availability falls, stocks usually weaken. Therefore, if this relationship is correct, rising Treasury activity should coincide with lower stock prices.
I could certainly be missing something, but I’ve been monitoring this relationship for a couple of months now, and I feel like I’m finally at the point where I can start mentioning it more regularly.
-Mike
Glossary by ChatGPT
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Basis Points: A unit equal to one hundredth of a percentage point, used to measure changes in financial values.
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Cash Market: The market in which financial instruments are traded for immediate delivery and settlement.
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Delta (Options): A measure of how much an option’s price is expected to change relative to a one-point move in the underlying asset.
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Diamond Pattern: A chart formation characterized by broadening followed by narrowing price action, often signaling a potential trend reversal.
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DTCC (Depository Trust & Clearing Corporation): A financial services company that provides clearing, settlement, and data services for markets.
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General Collateral (GC): High-quality securities widely accepted in repo transactions, influencing short-term funding rates.
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Implied Volatility: The market’s forecast of future volatility embedded in options prices.
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Repo (Repurchase Agreement): A short-term funding arrangement where securities are sold and later repurchased, used to manage liquidity.
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SOFR (Secured Overnight Financing Rate): A benchmark interest rate based on overnight loans collateralized by U.S. Treasury securities.
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Support Level: A price level where buying interest historically prevents an asset from declining further.
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Unfilled Gaps: Price ranges on a chart where no trading occurs, often revisited when markets retrace.
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VIX 1-Day: A one-day measure of expected S&P 500 volatility derived from options prices.
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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