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The S&P 500 finished roughly flat today ahead of the December jobs report on Friday, January 9, and a potential Supreme Court ruling on tariffs that could also come later that morning. As expected, the VIX 1-day rose to around 14, although that was somewhat lower than anticipated, given that it has typically moved into the mid-to-high teens in similar situations.
Even so, this suggests that market volatility remains relatively low. While bond-market volatility also increased on the day, it too remains subdued, as reflected by the MOVE index. As a result, there is a risk that the market is not properly positioned for a potential outcome in which the tariffs are struck down and previously collected tariffs are repaid.
Looking at today’s market rotation, it appears that investors were either covering short positions in staples or exiting long positions in technology. Alternatively, the moves may simply reflect positioning ahead of a potentially favorable ruling in which the tariffs are struck down. Staples rose sharply on the day, while technology stocks were hit hard for most of the session, leading to a notable divergence between the Nasdaq and the S&P 500.
At least when looking at the XLP-to-XLK ratio, there appears to be the potential for a change in trend. The ratio has broken its downtrend and may be in the early stages of a bottoming process. While it is still too early to confirm this shift, further upside in the ratio over the near term would help validate the idea that something may be changing in market rotation and in how investors are thinking about sector leadership.
Moreover, if tariffs were to be struck down, it would make sense for staples to outperform, as the sector would likely see cost relief and be better positioned to improve margins.
While there is no clear reason for the energy sector to outperform technology as a result of tariffs, it does appear that any rise in oil prices could be positive for the sector. More importantly, given how small a percentage energy represents in the broader market, it likely would not take much rotation to push the XLE higher relative to XLK. In addition, a bullish divergence appears to have formed in the RSI of the ratio, and perhaps more importantly, the ratio itself is beginning to trend higher.
It is also clear that part of this rotation is driven by a volatility dispersion trade, as earnings season begins next week with the banks. S&P 500 constituent implied volatility has been steadily rising, while index volatility has been suppressed.
This has resulted in the 1-month implied correlation index falling to the lower end of its range, while the dispersion index has risen to the upper end of its range.
The volatility compression is clearly visible in a chart of the NASDAQ 100, and any move to higher volatility is likely to lead to a significant decline in the technology-heavy index.
-Mike
Glossary by ChatGPT
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Dispersion Index: A measure of how widely individual stock returns or volatilities differ from the overall index.
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Implied Correlation Index: An indicator derived from options markets that estimates the average correlation among index constituents.
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MOVE Index: A benchmark index that measures implied volatility in U.S. Treasury markets.
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RSI (Relative Strength Index): A momentum oscillator used to assess overbought or oversold conditions in an asset.
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Volatility Dispersion Trade: A strategy that seeks to profit from differences between individual stock volatility and overall index volatility.
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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