Settlement Day Tuesday Returns as Software Leads Market Lower

Well, settlement Tuesday delivered once again, with the S&P 500 falling by 21 bps on the day. The move lower was mild by comparison, with the count now 24 out of 36 settlement days trading lower. This will next be an issue on Thursday, potentially for the market.

The software sector fell by more than 2% on the day, and apparently was the market’s preferred source of funds. The stats are pretty brutal. The IGV was rising on 10 out of 36 settlements with a cumulative decline of more than 30%.

As for moving forward, the S&P 500 has been battling at the 6,800 level for some time, and that remains the battleground, except that 6,800 is no longer support and instead resistance. The 10-day exponential average is also trending lower, and the RSI is trending lower as well, which is not a bullish indication at the moment.

6,800 is also an important area of resistance, as well, from a gamma point, with the bigger gamma now at 6,700.

The only thing that stands out is that implied volatility is still very high, and the spread between 1-month realized vol and implied vol is very wide. So, unless we see market volatility pick up, there is a good chance implied volatility will come down. Of course, the only problem is that we have no idea what the headlines will be and what oil will do.

Finally, Oracle reported results, and their CapEx and free cash flow are not a pretty picture. I know the stock was trading higher after hours, but that was a fairly obvious setup given how the more than 100% IV and heavy put positioning.

With lots of put delta positions at $180 and higher for this week’s and next week’s expiration.

But I mean, wow, assuming my math is right, on a trailing-twelve-month basis, Oracle’s Free Cash Flow is a negative $24 billion, with CapEx rising to more than $48 billion over the same time. Forget about the stock; I’ll watch CDS trading tomorrow to see whether the credit market is bullish.

-Mike

Glossary by ChatGPT

CapEx (Capital Expenditures) — Funds used by a company to acquire, upgrade, or maintain physical assets such as equipment, buildings, or technology infrastructure.

CDS (Credit Default Swap) — A financial derivative that allows investors to hedge or speculate on the credit risk of a borrower by providing insurance against default.

Free Cash Flow (FCF) — Cash generated by a company after accounting for capital expenditures, representing funds available for debt repayment, dividends, or reinvestment.

Gamma — An options risk measure describing the rate of change of delta relative to changes in the underlying asset price.

IGV (iShares Expanded Tech-Software Sector ETF) — An exchange-traded fund that tracks a broad basket of U.S. software companies.

Implied Volatility (IV) — The market’s expectation of future volatility derived from options prices.

Put Delta — The sensitivity of a put option’s price to a one-point change in the price of the underlying asset.

Realized Volatility — The actual historical volatility observed in an asset’s price over a specific period.

RSI (Relative Strength Index) — A momentum oscillator that measures the speed and magnitude of recent price changes to identify overbought or oversold conditions.

Settlement Day — The scheduled date when financial contracts, including derivatives or index settlements, are finalized and positions are settled.

10-Day Exponential Moving Average (EMA) — A technical indicator that places greater weight on recent prices to track short-term trend direction.

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.