S&P 500 Erases July Losses as Mega-Cap Technology Leads Market Rally

Stocks finished higher for the third day in a row, recouping all of the losses the S&P 500 had suffered since mid-July. Most of the move was driven by the mega-cap technology stocks that had declined during that period. The magnitude of the gains in these names has been unusually large and rapid, not the type of move you would normally expect to see. It also raises the question of how much of the rally has been driven by options activity. Based on the options volumes seen over the past few days, there is a good chance that options-related flows have been a major factor.

The same appears to be true for Amazon as well. That is not to take anything away from the rally, but it is important to understand what is driving moves of this magnitude, especially when they are as large and rapid as these have been.

At the same time, concerns in the semiconductor credit market have eased, with Nvidia’s CDS spread tightening to 67 basis points from its July 29 peak of 80 basis points. For now, the concerns that had been weighing on the credit market appear to have subsided.

Today, the VIX1D fell to a low of 6.75, and there is little room left for this measure of implied volatility to fall further. It is more likely than not that it moves higher from here and is closer to 15 or 20 by the end of the day on Thursday than it is to remain below 9.

Bond market volatility eased somewhat today, but only modestly. Measures of stock and bond market volatility have historically tended to move together over time, and the divergence between the two remains notable.

The 10-year Treasury yield fell by nearly 4 basis points today to finish at 4.68%. Today’s ISM Manufacturing report did little to push rates higher, and tomorrow’s JOLTS report will be followed by additional employment data later in the week. The 10-year appears to be positioned for a breakout above the current 4.70% area, but it will likely need a meaningful catalyst before that happens.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

Basis Point (bp): One one-hundredth of a percentage point, commonly used to measure changes in interest rates or yields.
CDS Spread: The cost of credit default swap protection, often used as a measure of perceived credit risk.
Implied Volatility: The market’s expectation of future price fluctuations as reflected in option prices.
ISM Manufacturing Report: A monthly survey of U.S. manufacturing activity that serves as a widely followed economic indicator.
JOLTS Report: The Job Openings and Labor Turnover Survey, which measures labor demand and workforce turnover in the U.S.
Mega-Cap Stocks: Companies with exceptionally large market capitalizations, typically among the largest publicly traded firms.
Options Flows: Buying and selling activity in the options market that can influence trading in the underlying securities.
Semiconductor Credit Market: The market’s assessment of credit risk for companies operating in the semiconductor industry.
S&P 500: A benchmark index tracking 500 of the largest publicly traded U.S. companies.
VIX1D: The Cboe One-Day Volatility Index, measuring the market’s expectation of S&P 500 volatility over the next trading day.

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