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Stocks Ascend To The Summit Ahead of December OPEX

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The shocks continued to roll through the markets on Thursday as the ECB and the BOE pushed back on the market expectations for rate cuts. This creates more questions than answers as to why the Fed decided to show its hand now. Unfortunately, we will have to wait ten more years to find out what happened because that is when the historical transcripts will be released and all the details of what took place, but we can speculate for now.

One thing that occurred to me today was that the reverse repo facility has largely blunted the Fed’s QT efforts, and perhaps the effects of telling the market it plans to lower rates will get money to finally move out of the facility so that the reserve balance can drain from the system. Instead, all this excess liquidity remains, is probably lent out, and finds its way back into stocks.

But now, with expectations for rates to go down, that could cause investors who have been playing the money market game to start moving that money out while Janet continues to issue Trillions in debt. If the estimates are correct, the Treasury is expected to issue $816 billion in the first quarter alone. The reverse repo facility, as of today, is $769 billion, down from over $2.2 trillion.

Many people may have missed that Powell mentioned the plan to reduce the portfolio and keep QT running to reduce reserves in the system and that once the reverse repo facility levels out, reserves will actually then be able to come down.  Right now, reserves are rising and falling, kind of like the market.

The repo rate at the Fed changes with policy and is currently at 5.3%. So, if there is a fear that rates will be going lower, it would seem to make sense to see some of that money move into places yielding higher rates while they can.

Anyway, tomorrow is a very big option expiration. The biggest of the year, and there will be a lot of gamma rolling out of the market, 41%, which means some stability leaves.


Now, I don’t have the total amount of net notional delta due to expire, but visually looking at this chart, it would seem that a lot more call deltas are due to expire tomorrow than put deltas. Also, I cannot see how the market makers are positioned, and we don’t know how many calls customers sold. Still, I’m guessing that the market makers will have a decent amount of futures and stocks to unwind following tomorrow’s option expiration, just for the S&P 500 of course.


I really don’t have much else to add. Structurally, the rally feels to me like it is built on sand. Based on my work, it was a very negative gamma-induced rally that took the market initially higher, followed by systematic flows, which led to vol compression and volatility selling, being capped off by opex.  So, until we get through tomorrow, it is very hard for me to know how much of the rally is actually real and how much is just mechanics.

I get that this may be difficult for some people to grasp, but I have a process, and unfortunately, sometimes it means getting things wrong. That may very well be the case this time. I’m just playing the cards I have been dealt.


Charts used with the permission of Bloomberg Finance L.P. 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.