Wall Street Got Its Post Election Stock Market Rally

Stocks rose today, and are we really surprised? As for the reason, I’m sure the media spent all day coming up with a good explanation. But as I noted last night, I expected a rally of around 1%, given that the 1-day VIX closed near 23. That level implied a move of roughly 1.5%, and we ended up with a 1.58% rally. Amazing how that works.

Of course, the 1-day VIX then collapsed, closing at 12. With Friday’s jobs report approaching, I would expect it to rise again tomorrow. I don’t think it will reach Tuesday’s levels, but I wouldn’t be surprised to see it close above 15.

There wasn’t much magic to the move. S&P 500 futures traded almost as a mirror image of the VIX throughout the day. Once it became clear that the VIX had found a floor, it was only a matter of time before the S&P 500 found its peak, which it did fairly early in the session.

Based on current levels of 1-month implied correlation and single-stock implied volatility, the VIX may actually be a bit too low. However, I would say it is roughly where it should be at this point.

Finally, the 5-year real yield rose by around 2 basis points today, closing at 2.40%. What matters, though, is that the 5-year nominal Treasury yield fell by 8 basis points to 4.68%, implying that 5-year inflation expectations declined by roughly 10 basis points. The 5-year CPI swap confirms that move, falling by about 8 basis points on the day to 2.27%.

(LSEG)

Ok, more tomorrow

-Mike

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Glossary by ChatGPT

Basis Point: A unit equal to one-hundredth of a percentage point, commonly used to measure changes in interest rates, bond yields, and inflation expectations.

Breakeven Inflation Rate: The difference between nominal Treasury yields and comparable-maturity Treasury Inflation-Protected Securities yields, representing market-implied inflation compensation.

CPI Swap: An inflation derivative that exchanges a fixed inflation rate for payments linked to realized Consumer Price Index inflation over a specified period.

Event-Related Volatility Premium: The additional implied volatility embedded in options ahead of an anticipated event, such as an election or economic report.

Implied Correlation: The average expected correlation among index constituents inferred from index-level and individual-stock options prices.

Implied Volatility: The market’s expectation of future price fluctuations derived from options prices.

Nominal Treasury Yield: The yield on a conventional Treasury security, reflecting both real interest rates and inflation compensation.

Real Yield: An inflation-adjusted interest rate, commonly measured using yields on Treasury Inflation-Protected Securities.

S&P 500 E-Mini Futures: Futures contracts based on the S&P 500 Index, commonly used to gain or hedge exposure to US large-cap equities.

Single-Stock Implied Volatility: The expected future price volatility of an individual company’s shares as reflected in its options prices.

VIX: The Cboe Volatility Index, which measures the options market’s expectation of S&P 500 volatility over the next 30 days.

VIX1D: The Cboe 1-Day Volatility Index, which measures expected S&P 500 volatility over approximately one trading day.

Volatility Crush: A rapid decline in implied volatility, often following the resolution of a major event, which can influence options-related hedging flows.

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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.