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The Magical Melting VIX Saves Stocks For Now

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1/8/24

#Stocks – $NVDA

#Macro – $SPX, $VIX, #Rates $OIL

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It was one of those days; as soon as I woke up, I knew it could be a long day because the VIX was up probably more than it should have been for flat futures. If it feels like Deja Vu, it is probably because I wrote something similar, not that long, ok.

Anyway, the one victory for the bulls is that, at least based on the gamma levels this morning, the index managed to close back in a positive gamma regime, which means that the positive effects of gamma will be volatility dampening, and that means that if we continue to move higher, it will go back to more of a grind.

The positive is that we broke a downtrend in the S&P 500 and also managed to close above the 10-day exponential moving average, which had served as resistance. Of course, that will need to be confirmed tomorrow, and if there has been a reversal of trend, that 10-day EMA should act as support.

Meanwhile, rates hardly moved today; initially, they were lower but finished down just two bps on the 10-year Treasury. Based on this, I would think the move in the equity market was separate from any move witnessed in the bond market, and Fed policy had little to do with any developments from the Fed. Rates would have been impacted more if there had been Fed-related news. For now, the 10-year struggles to get over the 200-day moving average.

The dollar index was hardly changed as well.

This goes more to the point that the move higher today in the S&P 500 was an implied volatility move higher, and I think it had little to do with anything else. More to the point, oil was down more than 4% daily as the Saudis cut prices due to weak demand.

Nvidia was also a big part of the move, allowing that big tech component of the market to work on news of a China-compliant chip and more AI mania ahead of this year’s CES.

The move has the signature marks of a gamma squeeze, with Skew falling, IV rising, and call volume surging. How far the rally can go depends on how long the gamma squeeze can commence.

There is also some decent gamma level at $520, $525, and $530, which is why the stock probably stalled out just below that most of the day.

Bloomberg

What can keep this stock working higher will be the options market, but if calls become too expensive, the rally will fade away quickly. The skew is already slanted to the calls, which means that calls are already more expensive. That isn’t to say they can’t become more expensive, but that is what appears to have happened today.

-Mike

 

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.