Stocks Give Back Early Gains As Implied Vol Jumps Ahead of FOMC Meeting

Stocks finished the day flat after a big opening move, with the gains vanishing in the afternoon. Implied volatility was bid for all day, and that is probably because there is a Fed meeting tomorrow. The VIX 1-Day rose to 21.5 from around 11 to start the day. I wonder what happens tomorrow around 2:35 PM ET. A volatility crush that pushes the S&P 500 higher regardless of what Powell has to say? Probably.

Of course, where that rally starts, where it goes, and how long it lasts is an entirely separate question. My guess is that implied volatility will likely keep rising tomorrow morning, which means stocks may very well start from a lower level heading into the FOMC meeting. They could rally during the meeting as IV melts, but what happens afterward will depend entirely on what the Fed says.

Today, we saw how much the TGA (Treasury General Account) rose yesterday, which was pretty much as expected. This brought reserve balances down, and I’m estimating they are probably around $3.25 trillion right now. Reserves should continue to decline as we approach quarter-end, with repo activity picking up and TGA levels stabilizing. It wouldn’t surprise me if reserves dip below $3 trillion by quarter-end, but we’ll see. That doesn’t necessarily mean the SPX has to fall, but history suggests it does due to the draining of the reserve balance.

Today, the NASDAQ 100 hit resistance at the trendline and attempted to break out but couldn’t. The NASDAQ is the index that matters because it’s been the leader, unlike the S&P 500 or the Dow, and it’s still 5.5% off its highs. The trendline in the NASDAQ is strong, and, for now, it’s keeping a lid on things. We’ll see if the NASDAQ can break through the 19,450 level, but my guess will be that it won’t.

It sure also looks like the S&P 500 put in a 2b top today when today’s high surpassed the high and closed below the price on August 30. If that is what it is, the rebound is over, and the next move is back down again.

-Mike

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