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Stocks finished relatively unchanged, with the S&P 500 down just 13 bps. Volatility measures, however, were very much on the move, with 1-month implied correlation higher, the S&P 500 dispersion index higher, the VIX higher, the VVIX higher, and the VIX1-Day higher. All of this is tied to tomorrow’s FOMC meeting; it seems the market is a bit nervous heading into it.
The VIX1-Day is likely to be around 20 or higher by 1:59 PM ET tomorrow, as we count down the final seconds to the statement and the dot plot. There are just too many permutations of how this meeting could play out to review them all. The higher the VIX 1-Day climbs, the more likely we are to see some kind of market rally once Powell finishes his prepared remarks, as the hedges driving volatility higher are unwound.
If the VIX does fall sharply and the market rises, that’s simply market mechanics—it has little to do with what Powell does or doesn’t say. Unless the Fed shocks the market by not cutting, or signals no further cuts in the dot plot, I’d be surprised if we don’t see a volatility crush at some point.
Wednesday is also a VIX options expiration, and there’s no doubt that some of the gyrations we’re seeing in the implied volatility complex are tied to that.
Meanwhile, it should come as no surprise that the TGA reached $857 billion on September 15—mission accomplished.
More importantly, based on my estimates, reserve balances are now likely below $3 trillion, at around $2.95 trillion. We’ll know more on Thursday when the official numbers are released, though they will likely shift somewhat by then.
I could go on, but I am not. I am tired and have had enough for today.
-Mike
Glossary – By CHATGPT
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Basis Points (bps) – A unit equal to one-hundredth of a percentage point, used to express changes in interest rates or index levels.
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Dot Plot – A chart published by the Federal Reserve showing individual FOMC members’ projections for the federal funds rate.
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FOMC (Federal Open Market Committee) – The branch of the Federal Reserve responsible for setting monetary policy, including interest rates.
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Hedge – A financial strategy used to reduce the risk of adverse price movements in an asset.
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Implied Correlation – A measure of how individual stock volatilities relate to the overall market volatility, derived from option pricing.
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Reserve Balances – Deposits held by commercial banks at the Federal Reserve, which are part of the banking system’s liquidity.
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S&P 500 Dispersion Index – A measure of how much individual S&P 500 stock returns differ from the index average, indicating variability in stock movements.
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TGA (Treasury General Account) – The U.S. Treasury’s primary operating account at the Federal Reserve.
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VIX (Volatility Index) – A real-time market index representing the market’s expectations for volatility over the coming 30 days.
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VIX1-Day – A version of the VIX measuring expected volatility for the next trading day.
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VIX Options Expiration – The date when VIX derivatives contracts expire, which can cause temporary volatility in the markets.
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VVIX – An index that measures the volatility of the VIX itself, often referred to as the “volatility of volatility.”
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.
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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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