Subscribe to The Free Market Chronicle and join the 2,750 subscribers getting it for FREE!
#Macro – $SPX, #rates, #oil
- RTM: Beyond Stretched
- RTM Unusual Options Activity: The TLT May Be Due To Pullback
- RTM: Damage Control
- Stocks Vs. OPEX
- RTM: Post FOMC Observation
Stocks rallied again, achieving even more extended levels, with the S&P 500 RSI rising to just shy of 82 while remaining above the oper Bollinger band. Again, this is reaching extreme overbought and stretched levels, and the best opportunity to pop this will come tomorrow, with VIX expiration. The way the calendar worked out let this whole thing drag on further than it should have, but we have no control over time or the calendar.
A lot of deltas are due to expire, and perhaps that will relieve some of the pinning and pressure on the market. At this point, the reflexive nature of the VIX flows has also been a factor in the rally, and once this comes off, the reset in the options market will be complete.
Meanwhile, the VIX Bollinger bandwidth has narrowed to 0.1 at historically low levels. It tells us that the realized volatility of the VIX is very low and tight, and I don’t think it would take much at this point to reverse this trend in the VIX.
I already showed you the chart yesterday of the S&P 500, and today’s chart is more stretched than yesterday’s.
Meanwhile, oil is showing some signs of breaking out, and given the events in the world, it seems pretty surprising to me it is this low to begin with. But as we can see, oil was very oversold with an RSI below 30 while trading below the lower Bollinger band. Now, oil has broken out above the 20-day moving average and, more importantly, can be heading to the upper band around $79. While rising oil prices won’t be felt in December’s inflation data points, it would likely be felt in the January data points.
If oil rises, the whole cycle with rates will start again because this was exactly what we saw take place in the summer. As oil prices climbed, rates rose, and I think that is exactly what we are likely to see start all over again because oil and the 10-year have been linked at the hip.
Why shouldn’t rates and oil rise? As measured by the CDX High yield spread, financial conditions have collapsed, as I noted it would if the Fed didn’t push back against the market’s pricing of rate cuts.
But more importantly, rising rates will come with a strong dollar, which means tightening financial conditions may be ahead. Additionally, with the prospects of fourth-quarter GDPNow estimates now at 2.7%, why shouldn’t the dollar strengthen? The US is still the strongest of the economies around the globe.
A stronger dollar and tighter financial conditions can lead to higher implied volatility.
This brings us back full circle and exactly to the point that Powell made about financial conditions and why he isn’t going to fight with the market because, in the end, he is right; financial conditions will get to be where they have to be.
It just means that inflation will linger, and the odds of another rate hike will begin to rise again.
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.