Subscribe to The Free Market Chronicle and join the 2,750 subscribers getting it for FREE!
#Macro – $SPX, $VIX, #FED
- RTM: Better Luck Next Time
- RTM: Is The Top Finally In?
- RTM: The Window For Volatility To Rise Is Now Open
It was a rough day for stocks, with the S&P 500 dropping by 1.5% following yesterday’s earnings and Powell crushing the market’s hope for a rate cut in March. Powell sounds like he is in no rush to cut rates, and why should he? The economy grew by around 4% in the second half of 2023, the unemployment rate is sub-4 %, and inflation isn’t back to target yet. From his point of view, there is no need to rush and take action at this point, and besides, the market has cut rates for him, with one of the aggressive easing of financial conditions since the financial crisis and pandemic. So, if the market wants to ease financial conditions, and monetary policy works through financial conditions, the market has done the work, why do anything?
My guess would be that if the market wants Powell to cut rates, it will need to give him a reason to cut. At the very least, it could start to tighten financial conditions and make the Fed fear policy becoming too tight. But hey, as long as the market will take the reins from Powell, he can be on cruise control and as patient as he wants. Maybe the market is figuring it out because the CDX High Yield spread may have broken out to the upside of the triangle pattern as the RSI breaks higher, suggesting “bullish” momentum for wider spreads.
The 2:35 PM ET Vol crush came on schedule today with that big surge in the SPX and a big drop in the VIX index. But once the implied volatility reset occurred, it was back to selling, and the selling picked up when Powell said a March rate cut was not likely.
We also saw the implied correlation index for 1,3,9, and 12 months all rise today. These will be important to watch over the next couple of days, and I think after we pass the next batch of Mag7 earnings tomorrow after the close, we should see implieds move higher as the short-volatility dispersion trade comes under some further pressure.
As discussed multiple times, implied volatility levels fall sharply when companies report results and as event risk passes. This is exactly what happened today after yesterday’s earnings, and the IV of the S&P 500 rose.
At least, as of this moment, things seem to be going as expected; now, I just have to see it continue to eventually see a return to much lower levels for the S&P 500 over the next several weeks.
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.