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Stocks Rally On May 2 As Implied Volatility Catches Up With Realized Volatility

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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Stocks were volatile today, but the S&P 500 managed to finish the day higher, by roughly 60 bps, to regain some of Friday’s losses. The index fell short of rising above resistance at 4,160. Still, tomorrow is the most challenging day because the FOMC meeting will come on Wednesday afternoon, and I think the Fed is likely to hike by the 50 bps and announce $95 billion per month in the balance sheet run-off. An inline announcement should be enough to bring the VIX back into the 20’s and send the S&P 500 higher back to 4,300.

If the Fed turns out to be more hawkish and Powell signals something worse than expected at the press conference, then my whole theory goes away. But based on what I have heard up until now, I don’t think the Fed is going to go with a shock and awe approach, so I think there will be very few if any surprises.

Additionally, with the VIX at 32, the market will need to see bigger declines in the days ahead, otherwise, realized volatility will eventually drag implied volatility lower, which means a lower VIX and higher S&P 500.

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This time, I think a rally will be much shorter than the March rally, as there are fewer outside events happening with no OPEX and quarter-end rebalancing. Additionally, real yields are moving up now, and the 10-Yr TIP rate is trading at a positive 15 bps today, which sent the TIP ETF plunging by 2.2%. So with the TIP ETF making new lows, it seems hard to imagine that the QQQ or SPY can’t get far, especially if the TIP ETF continues to drop.


The early tell today that something was changing in the market was that the ARKK sector was holding up despite a sell-off in the S&P 500 and NASDAQ. But until the ETF can clear that $55 region, a rally in this ETF doesn’t mean much of anything.

PayPal (PYPL)

PayPal was up today too, and is getting close to clearing resistance around $92. A breakout is looming following its disappointing results, and there is the potential for a move above $105.


Anyway, that’s all I have for today.


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 companies that issued these stocks. 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.

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