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Stocks, rates, and the dollar all increased today. As I noted over the week, short-dated implied volatility was very high heading into the China meeting. Basically, it was a scenario where stocks would rally as long as China didn’t walk away.
The VIX 1 day closed on Friday at 27 and opened today around 17. It continued to trade as low as 14.4. Clearly, hedges were closed out, helping to push the index higher.
The VIX also made a big move lower on the day, dropping to around 18.5. I am not sure how much lower the VIX can fall. I find it amazing that it is this low. I usually have a good feel for implied volatility, and I think readers of this commentary recognize that, but this time, my standard signals don’t seem to be working for me, and I do not know why. It is essential to understand the VIX because it gives us a sense of what the tailwind or headwind in the market is. The lower the VIX goes, the smaller the tailwind from here.
Meanwhile, the 10-year rose by 10 bps today, and continues to increase since breaking out late last week. I’m not sure what to make of this move yet, because there are a few reasons why rates could be rising; the only good scenario is that economic growth is expected to be strong.
At this point, it is hard to say this is the case because we really need to see what happens with the dollar. The dollar was stronger today, but we would need to see continued strength to believe that. For now, the USDJPY stopped at resistance, and we would need to penetrate that level to see further weakness.
Meanwhile, the EURUSD stopped right at support as well.
The implied volatility crush gave the S&P 500 the ability to rise over extreme resistance, which was noted over the weekend. If you are bearish, it is a positive that the SPX got over the 200-day moving average and cleared resistance. If you are bullish, you have to wonder what the next incremental driver will be.
Volumes were not all that impressive in the futures. So we probably won’t have an answer on anything for a few days.
Ultimately, is this all just about implied volatility and the dollar? One could make a strong argument. When looking at the USDJPY, it could be.
Otherwise, it is as clear as mud, with no absolute clarity. At this point, the market is trading flows and positioning, and I will add the move today
Mike
Terms By CHATGPT
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Short-dated implied volatility: The expected fluctuation in asset prices over a short period, based on options pricing.
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VIX: A ticker symbol for the Chicago Board Options Exchange’s Volatility Index, which measures market expectations of near-term volatility.
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Hedges: Investment strategies used to offset potential losses in other positions.
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Tailwind / Headwind: Metaphors for favorable (tailwind) or unfavorable (headwind) market conditions.
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10-year (referring to Treasury yield): The yield on the U.S. government’s 10-year bond, a key economic indicator.
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bps (basis points): A unit equal to 1/100th of a percent, used to describe changes in interest rates or yields.
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USDJPY: The currency exchange rate between the U.S. dollar and the Japanese yen.
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Resistance / Support: Technical analysis terms referring to price levels where an asset tends to stop rising (resistance) or falling (support).
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S&P 500 / SPX: A stock market index of 500 large companies listed in the U.S.; SPX is its ticker symbol.
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200-day moving average: A technical indicator showing the average closing price of a stock over the last 200 days, used to identify long-term trends.
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Bearish / Bullish: Market sentiment terms indicating expectation of falling (bearish) or rising (bullish) prices.
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Futures: Financial contracts obligating the buyer to purchase an asset at a predetermined future date and price.
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Implied volatility crush: A sharp drop in implied volatility, often after a known market event, which can cause options prices to fall.
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Flows and positioning: Refers to the movement of money in markets and how investors are allocated in different assets.
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.
Subscribe to receive this FREE daily commentary directly in your email
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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