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The S&P started the day significantly higher, up nearly 1%, but by midday, all those gains were erased, and we ended the session down 20 basis points. At its lowest, the S&P had been down about 70 basis points, reflecting a sharp swing from morning strength to afternoon weakness as sellers took control.
The big question is whether the neckline of the head and shoulder will break in the days to come. If it does, it could lead to a more significant drop in the 5,500s.
Market breadth also shifted dramatically. On the NYSE, there were nearly 1,300 more advancers than decliners at the open. By the close, there were 269 more decliners than advancers.
Nvidia
Notably, Nvidia played a critical role in cushioning the market’s overall decline without Nvidia’s 3% gain, which contributed four points to the Bloomberg 500. The index, a proxy for the S&P 500, might have ended the day down 50 to 60 basis points instead of just 20.
(BLOOMBERG)
Since its high on November 21st, it appears to be in a downtrend, with resistance levels around $139.50, stemming from June highs. A break below $132 could lead to a sharper decline, but conversely, a move toward $150 is also possible, depending on market momentum and sentiment.
The options market continues to heavily influence the stock, with nearly 2 million calls traded today versus 1 million puts. Call volume exceeded the five-day average of 1.8 million, driven by short-dated contracts like the January 3rd $140 and $138 calls, which were among the most active.
Implied volatility (IV) remains relatively low, around 44%, giving trader ability to play with cheaper call options.
ISM
Tomorrow’s Manufacturing ISM is expected at 48.2, down slightly from 48.4. Today’s S&P Global Manufacturing Report showed better-than-expected results but noted rising input costs.
Elsewhere, today’s initial jobless claims, at 211,000, were better than expected, and continuing claims, at 1.844 million, were below the forecast of 1.890 million.
As a result, Treasury yields rebounded after starting the day lower by five bps to finish flat, keeping the 10-year yield in its 4.55%- 4.60% range. A break above 4.60% could open the door to 4.75%.
Leverage
Financing costs, such as the March S&P 500 Total Return BTIC futures, were unchanged, while January contracts closed lower by nine points to 41—a significant drop from December 17th’s level of 225. This reflects a continued decline in demand for short-term leverage.
Primary dealer repo activity in equities also declined last week, signaling that while leverage demand is still high, it is contracting. This confirms what the futures contracts data tell us.
That’s all for today. Have a great evening, and we’ll see you again on Sunday!
-Mike
Terms
- Implied Volatility (IV): A measure of the market’s expectations of future price movements for a security, often used in options pricing. A higher IV indicates higher expected volatility.
2. BTIC (Basis Trade at Index Close): A futures trading strategy that locks in the price difference between a futures contract and its underlying index at the market close.
3. Moneyness: The relationship between an option’s strike price and the current price of the underlying asset. For example, “105% moneyness” means the strike price is 5% above the current price.
4. Inflation Swaps: Financial derivatives that allow investors to exchange fixed payments for payments tied to the rate of inflation, used to hedge or speculate on inflation changes.
5. Primary Dealer Repo Activity: Transactions where primary dealers borrow or lend securities (like equities) as collateral to obtain cash or leverage, crucial for short-term market liquidity.
6. Stagflationary Reading: Economic data that suggests a combination of stagnant growth and inflation, a challenging scenario for markets.
7. Short-Dated Options: Options contracts that expire in a very short timeframe, typically within days or weeks, used for speculative or hedging strategies.
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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.
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