Unlock Deeper Insights with Exclusive Member-Only Video Content on The Market Chronicles YouTube Channel – Just $34.99/Month
Job Report Impacts
NFP Live Zoom Replay 10.4.24
Jobs Report Preview
9/22/24
#MACRO: $SPY, $QQQ, #RESERVES, #MARGIN
This week will be relatively quiet in terms of economic data. The main events are Treasury auctions for 2-, 5-, and 7-year notes, scheduled around 1 PM Tuesday, Wednesday, and Thursday. Other than a few Fed speakers and limited economic releases, the market will likely reveal its true reaction to the Fed’s recent rate decision.
These days, it’s harder to get a clear sense of market direction in the immediate aftermath of a Fed decision, mainly because there’s so much noise around implied volatility and bond market positioning. Unfortunately, that initial knee-jerk reaction takes a few days to settle.
Implied volatility affects everything, and a similar pattern plays out across different assets. The chart below shows implied volatility in 2-year Treasury Futures, USD/JPY, and the S&P 500. Everything dropped at 2 PM ET following the Fed announcement, but it wasn’t until the end of the day on Friday that the market fully absorbed the news, mainly because the BOJ meeting also carried significant weight.
Implied volatility resets and market bets on both sides have made the unwinding process confusing. However, I believe that the noise will clear up this week. Additionally, last Friday’s options expiration, with the big gamma level at 5,700, was too strong for the equity market to trade freely.
This explains why the S&P 500 hovered around 5,700 during the last two trading days. It formed a diamond pattern, on top of the “hole-in-the-wall” gap that opened Thursday morning. This suggests we may fill that gap early this week, potentially seeing the index give back the post-Fed meeting gains and drop back toward 5,615.
Short sale volume in the SPY ETF was also unusually high on both Thursday and Friday and on a rolling 10-day basis, it has reached its highest level since mid-March.
An interesting observation is that increasing short-sale volumes on a rolling 10-day basis can sometimes precede market downturns. This trend becomes particularly evident when inverted and compared with the price action of the S&P 500. Last Thursday and Friday, short sellers appeared to be aggressively establishing new positions
The same case can also be made for the QQQ ETF, which has seen short-sale volume pick up.
This, of course, coincides with a sharp drop in reserve balances last week. More recently, it seems that the S&P 500 is trading with a few days lag relative to changes in reserves. The steep drop in reserves wasn’t felt as strongly in June, likely given the offset in additional funding from the yen carry trade. But given the carnage in the Yen carry trade, those funding effects will likely be significantly diminished. If the Yen carry trade effects have been neutralized, and the S&P 500 is trading with a lag to reserves, we should feel those effects this week. If those effects are not felt, perhaps reserve balances do not matter anymore. However, I sense that they still do.
I think it still matters because we have seen margin balances continue to change with reserves over time. Reserves fell further by the end of August, and margin balances declined in August. Additionally, data from FINRA shows that free credit balances in cash accounts have dropped to very low levels—the lowest since December 2019.
Remember, the market turned higher in the fall of 2019 because the Fed started “NOT QE,” which still led to expanding the balance sheet and reserves.
Also, changes in reserve balances appear to have some effect on bid-ask spreads, as seen with falling reserve balances and widening bid-ask spreads in the SPY ETF. It’s not the largest sample size, but it’s worth continuing to track.
We will see what the week brings, but this week may be a little more challenging than most expect.
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.