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3 Takeaways
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Historical trends show low realized volatility levels are often followed by sharp surges.
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Monitor funding markets closely, with SOFR trading above the Fed Funds rate signaling persistent liquidity tightness despite slight easing.
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Watch equity leadership shifts, as stocks like Blackstone and Meta show divergence from the S&P 500, which may indicate broader market inflection points.
Today we saw 1-month realized volatility fall to 6.2%, which is fairly low on a historical basis. It may go lower still, but it is important to note that the last times it reached similar levels were in July 2024, November 2019, April 2019, October 2018, and October 2017. Each of those periods of low volatility was followed by a surge in volatility.
The dispersion index also rose today to 34.5, a level it has rarely reached based on historical data.
We’ve also been in one of those rare spot-up/vol-up scenarios, with the VIX trending higher alongside stocks.
SOFR printed at 4.24% this morning, just 1 bp below the upper end of the Fed Funds target range and 15 bps above the effective funds rate. Liquidity in the overnight market remains very tight, and while funding pressures eased somewhat today, the relief was minimal.
GC traded down to 4.24% from 4.30% yesterday, which suggests SOFR should also move lower, likely to around 4.17–4.18%. That would still leave it about 9 bps above the Fed Funds rate, indicating funding conditions remain tight.
Based on my estimates, with the TGA reaching $890 billion yesterday, reserve balances likely fell to about $2.85 trillion. By Thursday’s SOMA release, they should be closer to $2.9 trillion. The low level of reserves is driving much of the overnight funding volatility we’re seeing.
If we move away from volatility suppression and liquidity conditions and look at a stock like Blackstone (black line), it’s clear the stock is sending a message. Historically, it has a good track record of peaking before the S&P 500 (blue line). Maybe this time will be different…
Another interesting point is that Meta hasn’t participated at all in the recent move higher in the index. Maybe the market is tired of all the AI spending the company has done—I don’t know—but it’s something to watch, as Meta also has a history of peaking before the S&P 500.
It feels like the music has stopped, but the market is still dancing to its own beat, even with the lights off.
-Mike
Glossary by ChatGPT
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Dispersion Index: A measure of the degree to which individual stock returns deviate from the overall index performance, often used to gauge market breadth and risk.
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Effective Federal Funds Rate (EFFR): The weighted average rate at which banks trade federal funds with each other overnight.
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GC (General Collateral): A benchmark repo rate secured by high-quality collateral such as Treasuries, often used as a proxy for secured overnight funding costs.
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Realized Volatility: The actual historical volatility of an asset over a given time period, calculated from past price movements.
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SOFR (Secured Overnight Financing Rate): A benchmark interest rate for dollar-denominated derivatives and loans, based on overnight Treasury repurchase agreements.
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SOMA (System Open Market Account): The Federal Reserve’s portfolio of U.S. Treasury and agency securities used in open market operations.
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TGA (Treasury General Account): The U.S. Treasury’s operating account at the Federal Reserve, used to manage government cash balances.
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VIX (CBOE Volatility Index): A measure of expected stock market volatility based on options prices of the S&P 500, often called the “fear gauge.”
Disclosure
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.
Subscribe to receive this FREE daily commentary directly in your email
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.
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