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A relatively quiet day overall followed the morning volatility crash, with no new developments in the Israel-Iran conflict over the weekend, making it relatively easy for IV to drop sharply. Mostly, it felt like standard operating procedure in the market: as soon as the VIX found its floor, the S&P 500 hit its ceiling.
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Additionally, implied correlation and volatility fell during the session, while my proxies indicated that realized correlation and volatility increased. This ties back to last week’s conversation about the market’s ability to produce big upward moves in the SPX without driving implied volatility higher, essentially limiting further downside in implied volatility at this stage.
Tonight is the Bank of Japan meeting, and it’s an important one. It will set the tone for long-end rates—not just in Japan, but globally. Japan has long served as the global anchor for low rates, but lately, rates there have risen significantly. While markets don’t anticipate a change in the overnight rate, they do expect the BOJ to discuss potentially slowing the pace of its tapering in long-end bonds. The 40-year bond has attracted the most attention recently, and for good reason—making the BOJ’s commentary tonight particularly impactful.
It will also matter for U.S. rates because global bond yields often move in tandem. Based on today’s session, it looks like the U.S. 30-year yield has broken out from another bull flag pattern, suggesting it could move higher from here.
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Given that we’re discussing Asia, it’s also worth noting the continued strength in the Taiwan dollar. This matters because many investors in Asia remain unhedged against dollar movements, and Taiwan appears to have some of the most exposure. Examining the chart, it seems reasonable to conclude that the Taiwan dollar likely has further room to strengthen from its current levels.
Looking at the S&P 500 today, after breaking the rising wedge on Friday, we came back and retested that breakdown level, and so far, it has held. Additionally, today’s move filled the gap from Friday’s open. If the rising wedge pattern is valid, the index should start declining tomorrow and continue downward essentially uninterrupted. If this doesn’t occur, it would suggest that a different pattern or scenario is unfolding.
-Mike
Terms by ChatGPT
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Volatility Crush: A sharp drop in implied volatility, typically after uncertainty around a specific event dissipates.
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Implied Correlation: Measures the expected co-movement of assets within an index, as implied by options pricing.
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Realized Correlation: The actual historical co-movement between assets, measured from past market data.
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Bull Flag: A chart pattern characterized by a strong upward move (the “flagpole”) followed by a brief consolidation or downward-sloping channel (the “flag”), typically signaling another leg higher.
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Rising Wedge: A technical chart pattern featuring converging upward-sloping trendlines that usually signals a reversal to the downside.
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Gap Fill: A price action move that fully retraces an earlier gap (where trading skipped price levels).
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Long-End Rates: Interest rates associated with bonds or securities that mature in a long-term horizon, typically beyond 10 years.
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Unhedged Currency Exposure: Holding investments without protection against currency fluctuations, meaning currency movements directly impact returns.
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.
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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