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Volume in the S&P 500 futures has completely vanished over the last couple of days, with contract counts declining each session. The rising wedge pattern didn’t work out, despite several attempts that brought us close. Unfortunately, close isn’t good enough. I don’t think anyone needs me to say that the possibility of the market reaching a new high is a given; I have said that many times when we got over 5,800. However, I’m skeptical about this, as market dynamics today are not what they were in 2020 or 2022/23.
There’s not much that can snap the market out of this malaise until we get new commentary on tariffs or some economic data that changes the narrative. As I noted yesterday, with implied volatility at 17 and realized volatility below 12, it’ll be challenging to see the market move in anything but a tedious grind, similar to what we experienced in the days leading up to the recent push higher, which was only able to occur because the VIX spike to 21.
In some ways, the current environment reminds me a lot of early 2018. The Nasdaq dropped about 15% in January 2018, followed by a full recovery and new highs, only to give it all back again shortly afterward. I’m not exactly sure why it feels reminiscent, but it does. However, just because something reminds us of the past doesn’t mean it’s a roadmap for the future.
Meanwhile, as we know, this market is only as strong as Nvidia. The biggest issue right now is that Nvidia is officially overbought, trading above its upper Bollinger Band with an RSI approaching 74. Of course, it could become even more overbought, but it’s already pushing the limits at this point.
Meanwhile, repo market rates rose today as the quarter-end approaches. The trade-weighted average repo rate reached 4.41%, and I would expect tomorrow morning’s SOFR to rise above today’s 4.3%. Typically, as we head into quarter-end, overnight funding markets tighten, which drains liquidity from the market.
Nothing has to happen, but when things happen often enough, I pay attention to them.
-Mike
Terms By ChatGPT
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Repo Market:
Short for “repurchase agreement market,” this is where financial institutions lend cash overnight (or short-term) in exchange for collateral, usually Treasury securities.
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Trade-weighted Average Repo Rate:
An average interest rate for repo transactions, weighted by the volume of trades executed during the day. It provides an accurate measure of overall funding conditions.
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SOFR (Secured Overnight Financing Rate):
A benchmark interest rate reflecting overnight borrowing costs in the Treasury collateralized lending (repo) market. It serves as an alternative to LIBOR and is used broadly to price loans and derivatives.
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Quarter-end Funding Tightening:
At the end of each quarter, banks and financial institutions often reduce their lending to make their balance sheets appear stronger for regulatory reporting (“window dressing”). This can cause a spike in short-term borrowing rates and tightening of liquidity.
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Upper Bollinger Band:
A technical indicator consisting of two standard deviations above a moving average. When a stock trades above this upper band, it’s considered technically overbought, implying possible mean reversion.
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RSI (Relative Strength Index):
A momentum indicator ranging from 0 to 100, typically signaling an asset is “overbought” above 70 or “oversold” below 30. An RSI approaching 74 suggests extreme bullish sentiment and may signal a potential reversal.
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Implied Volatility vs. Realized Volatility:
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Implied volatility is derived from option prices, representing the market’s expectation for future volatility.
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Realized volatility is the actual historical volatility observed in price movements.
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