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1/3/24
#Stocks – $IWM
#Macro – $SPX, #Rates
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Stocks fell for a second day, with the S&P 500 dropping by around 80 bps. The index gapped lower, unwinding the big buy imbalance at yesterday’s close. It did find support on a few occasions at 4,700, serving as the put wall today. This lower move likely sent the index into negative gamma, with the zero gamma level at 4,740. Unless the zero gamma level starts to move lower or the S&P 500 moves higher, we are likely to see negative gamma lead to expanding levels of volatility, which could mean that equities are pressured lower.
Once 4,700 breaks, the index can accelerate as negative gamma expands volatility, and the next significant level of gamma is not until 4650 or 4600. The nature of the rally was on what looked to be unstable ground, and there was a sizeable gap around 4550. So if things start breaking down below 4,700, then the pace of the sell-off has plenty of room to run until a stabilization area is found.
Today also saw small-cap stocks get hit fairly hard, with the Russell 2000 IWM ETF falling by almost 2.7% on the day. The ETF managed to close below all of the prior tops after just breaking above all of those tops in mid-December. When an asset moves above its prior highs and fails to find support at those prior highs, it is generally not a sign of good things to come. Unless the IWM can quickly turn higher and move back above the $199 level, the outlook doesn’t look good. The big support level for the IWM is the gap around $193; below that, a drop back to $180 becomes possible.
The 10-year tried to move beyond the downtrend today but failed, giving back some of the moves higher in rates, following the Fed minutes.
For the most part, the Fed minutes didn’t reveal much we didn’t know, which is that the Fed probably isn’t cutting rates as aggressively as the “market” priced in. The other interesting point about the Fed minutes was the conversation around starting to prepare for the eventual end of QT. The Fed will likely end QT before the Reverse Repo Facility drains completely. The point is that the Treasury will issue a lot of debt over the first quarter, and the repo facility may drain much faster than most people expect. There is no clear sign of ample reserves, as it would be the level of reserves needed to fund the overnight market without causing the General Collateral (SOFR) rate to spike. I have seen estimates that reserves need to stay around $3 trillion for reserve balances to remain ample, which makes sense to me, as I have heard Fed offical speak of estimates that are around 10% of nominal GDP, which would be around $2.8 trillion. So, with reserves currently around $3.45 trillion, the days of excess reserve are coming to an end, and that is likely to create a deleveraging event. Because the market cap of the S&P 500 is extremely strechted when compared to current reserve balances. But I’m not going to get into that today.
-Mike
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.Â
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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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