Stocks Rally, But Volatility Levels Suggest There Isn’t Much Left To Gain

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Stocks were up pretty big today, at least on the surface, with the S&P 500 rising by 63 basis points. However, when we look at the market overall, the volume of S&P 500 futures was very weak, with just 1.1 million contracts traded. Based on preliminary data, that’s easily one of the lowest volume days since around December 30. On the SPY, just over 39 million shares traded and had one of the lightest trading days since Christmas Eve.

On the Bloomberg 500, which reflects the S&P 500, 305 stocks declined, 193 rose, and three were unchanged. Nvidia and Microsoft accounted for 86% of the day’s gains, with Nvidia contributing 45% and Microsoft 41%. Amazon contributed 12%, and Netflix 11%. Essentially, four stocks contributed nearly all of the day’s gains.

(BLOOMBERG)

Meanwhile, the RSP, an equal-weighted S&P 500 index ETF, finished the day down nearly 40 basis points. This highlights that while the broader market appeared strong, the gains were concentrated, and things weren’t as robust beneath the surface. The RSP has stalled at the 61.8% retracement level.

Volatility metrics also signaled weakness. The VIX rose, and the VVIX increased by about two points to close at 100. Interestingly, the VIX 1-Day—a short-term volatility measure—was at 22.5 on January 14 but closed at 9.9 today. This suggests a mechanical reset in implied volatility has primarily driven the recent S&P 500 rally.

Before the December 17 VIX -1 day spike (one day before the Fed meeting), the VIX 1-Day had been bottoming around five each morning and topping at nine. This indicates limited downside for the VIX 1-Day in the near term, especially with major events like the BOJ meeting, GDP, PCE, Fed/ECB meetings, and significant earnings reports in the coming days.

The implied correlation index, which closed today at 8.19, is historically low, having only been lower once in 20 years (July 2024). This suggests limited room for downside in implied correlation, meaning the S&P 500 may struggle to rally much further if recent moves were primarily mechanical.

Treasury yields increased today, with the 10-year rising four basis points to 4.61%. The 5-year yield was up 4.5 basis points, while the 30-year rose only two basis points. The 10-year has bounced off support at 4.52%.

Inflation swaps for January, February, and March CPI haven’t changed. But the 2-year inflation swap has dropped some. The Recent moves in 2-year inflation swaps seem tied to oil prices, with oil driving the earlier rise this month and the more recent drop.

That’s all I have for today. Hope you have a great evening. Bye!

-Mike

Terms By ChatGPT

1. VIX 1-Day: A measure of expected stock market volatility over a single day, reflecting very short-term sentiment.

2. VVIX: Tracks the volatility of the VIX itself, indicating how unstable expectations of market volatility are.

3. Implied Correlation Index: Measures how much individual stocks in the S&P 500 move in sync, often linked to market-wide trends.

4. CPI Swaps: Financial contracts that let investors hedge or speculate on changes in consumer inflation over time.

5. TGA (Treasury General Account): The main account used by the U.S. Treasury at the Federal Reserve, which influences overall liquidity in the financial system.

6. Reserve Balances: The money that commercial banks keep on deposit at the Federal Reserve, impacting lending and liquidity.

7. Mechanical Move: A market movement caused by technical adjustments or automated processes, rather than fundamental news or events.

8. Implied Volatility Reset: A drop in expected market volatility that can drive prices higher due to adjustments in options pricing models.

9. Bloomberg 500: A proprietary Bloomberg terminal tool that breaks down S&P 500 stock performance.

10. Equal-Weight Index (RSP): An index where every stock gets the same influence, unlike market-cap-weighted indexes like the S&P 500.

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