Stocks rallied on Friday, but I think it’s fairly clear that the gamma squeeze has run its course, and the market has largely returned to normal trading flows. Net options volume shifted back toward puts leading calls after the sharp surge in activity earlier in the week that pushed the market from a negative gamma regime into a positive one.

T-bill issuance will remain heavy over the next few weeks, so liquidity should continue to be an important driver of the market. Until the recent three-day rally, that relationship had been working quite well. This episode, however, shows that forces outside of liquidity can still dominate market direction. Overall, as the chart illustrates, the market has tended to move in a slow, grinding fashion, and I would not be surprised to see that downward-tilting grind resume.

The next chart shows what happens when the S&P 500 is shifted back by 12 days. The correlation strengthens from -0.10 to -0.49, with the R² increasing to 0.24. If the effects of the liquidity drain are strongest roughly two weeks after the actual drain date, then we are only now entering the period when the market should feel the greatest impact.

Additionally, equity repo financing activity, as tracked by the New York Fed, has declined in recent weeks. While the data currently only extends through July 29, the reports for the weeks ending August 6 and August 13 will be particularly important. We’ll have to wait for those releases, but if the market continues to rally without a corresponding pickup in equity repo financing, it would suggest that forces other than liquidity are driving the advance.

Additionally, we have begun to see some activity in the five-year USD/JPY cross-currency basis swap. While the move has been modest, it could be an early sign that hedging demand is increasing. With both U.S. and Japanese policymakers seemingly unwilling to tolerate further yen weakness, increased currency hedging could divert dollars away from the equity market and reduce a source of liquidity for risk assets.

The same is true for the five-year USD/CHF cross-currency basis swap.

So, if liquidity continues to tighten as it has been, and the gamma squeeze has indeed run its course, I would expect the market to return to the environment that existed before the squeeze began.

Anyway, I guess we’ll see where things stand when I return next Saturday.

-Mike

Glossary by ChatGPT

Cross-currency basis swap — A derivative that exchanges funding in two currencies, with the basis reflecting relative demand and funding conditions between them.

Equity repo financing — Short-term secured financing backed by equity securities, often used as an indicator of leverage and funding availability in equity markets.

Gamma squeeze — A market move amplified when options dealers must buy or sell the underlying asset to hedge rapidly changing options exposure.

Negative gamma regime — A positioning environment in which dealer hedging can amplify market moves by selling as prices fall and buying as prices rise.

Net options volume — The relative balance of options trading activity, such as put versus call volume, used to assess positioning and directional demand.

Positive gamma regime — A positioning environment in which dealer hedging tends to dampen market moves by buying declines and selling rallies.

R² — A statistical measure showing how much of the variation in one variable is explained by its relationship with another variable.

T-bill issuance — The sale of short-term U.S. Treasury securities, which can affect financial-system liquidity by absorbing available cash.

USD/CHF cross-currency basis swap — A cross-currency funding instrument whose basis reflects relative demand to exchange U.S. dollar and Swiss franc funding.

USD/JPY cross-currency basis swap — A cross-currency funding instrument whose basis reflects relative demand to exchange U.S. dollar and Japanese yen funding.

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.

The market rally extended this week, with the S&P rising on Monday and Tuesday and finishing just above Tuesday’s close, though below Wednesday’s intraday highs. As I wrote during the week, much of what we saw was heavy call volume driving the market higher, especially on Monday and Tuesday, a gamma squeeze in essence. When that volume came off on Thursday, the market stalled. The other component was implied volatility coming down, not just on the VIX but on the VIX 1-Day as well, a clear volatility crush. Following the Fed meeting on the 29th, implied vol on the VIX 1-Day was around 19.5, and it has come down sharply since.

That framing matters because we entered the weekend in a negative gamma environment (a state where dealer hedging can amplify market moves). Coming out of it with volatility falling and call volume surging to the upside created an environment ripe for a big move. I wrote about the same idea for MarketWatch: gamma exposure shifted from negative to positive as the market rallied, creating a gamma squeeze that pushed the market higher, at least at the beginning of the week.

As of Friday, the call wall sits around 7,800, with plenty of gamma built up at 7,750 and 7,800, while the put wall is all the way down at 7,400. That tells me that if the market starts to drift lower, there is a big air pocket, with not much support from an options perspective until 7,400. That can obviously change, since we don’t know where volumes and open interest will settle out on Monday morning, but as of Friday that is the information we have to work with.

The other important point is that we are entering the part of the year when the dispersion trade unwinds. Single-stock implied volatility rises sharply heading into earnings, and once results pass and that volatility comes off, the spread between single-stock vol and index vol naturally shrinks, as it has after reaching record highs. As that spread narrows, dispersion should come down and correlations should begin to rise. To this point, they have, as three-month correlations reached record lows just a couple of weeks ago.

I like to look at the spread between dispersion and three-month implied correlations because it offers a good proxy for the direction of the S&P. It doesn’t tell us how much the index will rise or fall, but it gives a good sense of which way it is likely to move. By the end of the week, that spread was clearly heading lower. Nothing is a perfect indicator, and there have been times when the market’s reaction was delayed. It’s also quite possible dispersion picks back up as we get closer to NVIDIA’s earnings in late August, with Broadcom right around the same time, since those are two heavily weighted index components. But if the spread continues to come down, mechanically it is telling us the market should continue to unwind as well. The gamma squeeze distorted things, though I think that has largely worked itself off at this point.

The Nasdaq, clearly, hasn’t recovered to the same degree, retracing to between the 61.8% and 78.6% levels on a closing basis. If the Nasdaq is not going to make a new high, this is really where it should stop; usually, getting through the 78.6% level means you’re probably going back to the highs. If it stalls here and turns lower, I would think the dispersion unwind continues to weigh.

Perhaps more importantly, 10-year rates gave back very little of Thursday’s rise despite the big jobs report miss. Ten-year real yields are moving higher, now at 2.43%, up about 70 basis points since early March. That isn’t as large as the nearly 1.5% rise from April 2023 into October, which eventually led to a sharp decline in the S&P, but it is beginning to get on that scale, and history suggests the market reacts with a delay. It may only take another 10 or 20 basis points, to roughly a 90 basis point move, before impacts start showing up.

The 10-year real yield is also now trading above the 10-year breakeven inflation expectation, something that hasn’t happened since 2007, which suggests that for the first time in two decades the market is doing some of the work for the Fed in tightening policy. That preceded the housing bubble popping in July of 2007, right before the market ultimately peaked. I’m not saying we’re due for some big top, but rate policy may finally be getting to a point where it starts to matter a little more, and if real rates separate further from inflation expectations, that would be a dynamic worth monitoring closely.

-Mike

Glossary by Claude

• Gamma squeeze: A rally amplified by dealers buying the underlying index to hedge as heavy call buying pushes their gamma exposure positive.

• Negative gamma: A dealer positioning state in which hedging flows amplify market moves rather than dampen them.

• Call wall / put wall: The strikes with the heaviest call or put open interest, which tend to act as resistance and support for the index.

• VIX 1-Day: An index measuring implied volatility for just the next trading session.

• Volatility crush: A rapid decline in implied volatility, often after an event the market had priced as risky.

• Dispersion: A measure of how much individual stocks move independently of the index.

• Implied correlation: The market’s pricing of how closely stocks in the index are expected to move together.

• Real yield: A Treasury yield after subtracting expected inflation, as measured by TIPS.

• Breakeven inflation rate: The gap between nominal Treasury and TIPS yields, reflecting the market’s expected inflation.

Disclaimer

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.

Stocks were mostly lower on August 6, a day ahead of the jobs report. Surprisingly, implied volatility remained rather subdued, with the VIX 1-Day finishing around 12. I would have expected something closer to 15, but we did not get that. That means the odds of a post-NFP volatility crush sending stocks sharply higher are relatively low.

Bond yields, on the other hand, rose on the day, with the 10-year yield climbing nearly 6 bps to 4.67% and the 30-year yield rising 4 bps to 5.21%. The 30-year still appears to me to be in a position to move significantly higher from current levels.

Currently, the 30-year yield is roughly 8 bps below its recent highs, and if it can get through 5.3%, there isn’t much standing in its way from a technical standpoint. That could open the door to 5.5% or even 5.85%. The ascending triangle pattern on the weekly chart paints a pretty convincing picture, in my view.

The structure of the rally in the S&P 500 looks fairly flimsy, with several gaps helping to push the index higher, including two that followed sell-offs into the close. I simply do not trust charts where the market sells off into the close and then gaps higher the following day. I find those patterns to be rather unstable, and the gaps tend to fill over time. One could imagine that a negative headline or two may be all that is needed to push the index lower and begin filling those gaps.

Dispersion is unwinding rather quickly now that earnings season is wrapping up, which means stocks are starting to trade together more often. While dispersion remains elevated, it could have further to unwind. The only thing missing at this point is correlation, which remains very low.

If dispersion continues to decline, one would expect implied correlations to naturally start to rise, bringing the market back to moving more as one again. I’m not sure what headline will move that process along, but the likelihood of the unwind picking up steam should only grow as earnings season comes to an end.

It is no surprise to me that now that call volumes in the S&P 500 have subsided, the move in the index has as well. The gamma squeeze appears to be over.

Glossary by ChatGPT

Ascending Triangle — A bullish technical chart pattern characterized by rising lows converging toward a relatively flat resistance level.

Basis Point (bps) — A unit equal to 0.01 percentage point, commonly used to describe changes in interest rates and bond yields.

Call Volume — The number of call option contracts traded over a specified period.

Correlation — A statistical measure describing the degree to which two or more securities move in relation to one another.

Dispersion — The degree to which individual stock returns differ from one another within an index or market.

Gamma Squeeze — A market dynamic in which options-related hedging activity can accelerate price movements as dealers adjust their exposure.

Implied Correlation — The level of correlation among index constituents implied by the pricing relationship between index and single-stock options.

Implied Volatility — The market’s options-derived expectation for the magnitude of future price movements.

NFP — Nonfarm Payrolls, a key U.S. employment report measuring changes in payroll employment excluding several categories, including farm workers.

Volatility Crush — A rapid decline in implied volatility, often following the resolution of a scheduled event or uncertainty.

VIX 1-Day — The Cboe 1-Day Volatility Index, which measures expected S&P 500 volatility over approximately the next trading day.

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.

The rally stalled today, which isn’t surprising and probably adds credibility to the view that the recent advance was largely gamma-driven. More importantly, single-stock implied volatility fell sharply as the post-earnings volatility unwind continued. As companies report earnings, the uncertainty surrounding those events is removed, causing implied volatility to decline. I don’t know how much further single-stock volatility will fall, but I would expect the gap between single-stock implied volatility and the VIX to continue narrowing.

The key here is that this unwind in implied volatility should lead to lower implied dispersion and higher implied correlations. As the spread between dispersion and correlation narrows, it has generally coincided with a more risk-off environment. While the relationship is not perfect, it has been reliable enough over time to make it an indicator worth monitoring.

The Korean won strengthened by about 50 basis points today, and technically it appears poised to strengthen further. The USD/KRW exchange rate is currently testing support around 1,420, and a decisive break below that level could open the door to a move toward 1,380.

What another leg of won strength would mean for the semiconductor sector is a good question, and one I’m looking forward to finding the answer to. The theory I’ve been working with is that a stronger won is generally a headwind for the sector, and that relationship has held up reasonably well, aside from the past couple of trading sessions. There is a strong fundamental case to support that view.

Sticking with FX, despite the latest round of intervention in the USD/JPY, the five-year USD/JPY cross-currency basis swap has remained remarkably stable. If the market were expecting a sustained appreciation of the yen against the dollar, I would expect the basis to become more negative. Instead, it has remained largely unchanged, suggesting the market is not yet pricing in a significant move higher in the yen.

(LSEG)

I think that is all for today.

Mike

Glossary by ChatGPT

• Cross-Currency Basis Swap — A derivative that reflects the cost of exchanging funding between two currencies and can indicate demand for one currency relative to another.

• Dispersion — The difference between the implied volatility of individual stocks and the implied volatility of the broader index.

• Gamma-Driven — Describes price moves amplified by options dealers’ hedging activity related to changes in option gamma exposure.

• Implied Correlation — The market’s expected degree to which stocks within an index will move together.

• Implied Dispersion — The market-implied difference between index volatility and the volatility of its constituent stocks.

• Implied Volatility — The market’s expectation of future price volatility derived from option prices.

• Post-Earnings Volatility Unwind — The typical decline in implied volatility after an earnings announcement removes event-related uncertainty.

• VIX — The CBOE Volatility Index, commonly used as a measure of expected 30-day volatility for the S&P 500.

• USD/JPY — The foreign exchange rate representing the value of the U.S. dollar relative to the Japanese yen.

• USD/KRW — The foreign exchange rate representing the value of the U.S. dollar relative to the South Korean won.

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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It was the semiconductors’ turn to rally today as the merry-go-round continued. It has been a very odd couple of trading sessions, given the magnitude of the moves we’ve witnessed. Nvidia and Broadcom led the market higher today.

The market seems very erratic these days, and I don’t know whether it is due to a lack of liquidity, options trading, or positioning that has become offside and is creating squeezes. It just doesn’t seem normal to me. What stands out, both from memory and the current data, is that gamma positioning in the S&P 500 had been negative while delta positioning was essentially flat. The SPY was even more extreme, with both gamma and delta positioning negative, and both have now violently reversed into positive territory. The market had been positioned for a move lower, but instead everything was flipped on its head, and those negative gamma and delta positions have been squeezed out and unwound.

It explains the violent move. More importantly, now that we are back in positive gamma and gamma exposure actually declined today, it suggests the squeeze is probably over. Additionally, with a heavy slate of economic data still to come this week, implied volatility is likely to continue rising. That is likely why the 1-day VIX closed near 14 today. I would not be surprised to see it closer to 20 by the close on Thursday, given Friday morning’s jobs report.

Additionally, the spread between dispersion and correlation narrowed today, continuing to send a non-confirmation signal on the rally over the past few sessions. Ultimately, this spread has tended to be a reliable indicator of the index’s direction over time, and I suspect it will continue to contract.

-Mike

Glossary by ChatGPT

• Correlation — A statistical measure of how closely securities or markets move together over time.

• Delta Positioning — The aggregate directional exposure of options positions to changes in the price of the underlying asset.

• Dispersion — The degree to which the performance of individual stocks differs from the overall index.

• Gamma — An options risk measure that reflects how rapidly delta changes as the underlying asset’s price moves.

• Gamma Exposure — The net market sensitivity to gamma, often influencing dealer hedging activity and market volatility.

• Implied Volatility — The market’s expectation of future price volatility as reflected in options prices.

• Liquidity — The ease with which an asset can be bought or sold without significantly affecting its price.

• Negative Gamma — A market condition in which dealer hedging can amplify price movements rather than dampen them.

• Positioning — The aggregate exposure and allocation of market participants across assets or derivatives.

• SPY — The SPDR S&P 500 ETF Trust, an exchange-traded fund designed to track the performance of the S&P 500 Index.

• Squeeze — A rapid price move driven by traders being forced to unwind positions, often accelerating momentum.

• VIX — The CBOE Volatility Index, commonly used as a measure of expected market volatility over the next 30 days.

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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Stocks finished higher for the third day in a row, recouping all of the losses the S&P 500 had suffered since mid-July. Most of the move was driven by the mega-cap technology stocks that had declined during that period. The magnitude of the gains in these names has been unusually large and rapid, not the type of move you would normally expect to see. It also raises the question of how much of the rally has been driven by options activity. Based on the options volumes seen over the past few days, there is a good chance that options-related flows have been a major factor.

The same appears to be true for Amazon as well. That is not to take anything away from the rally, but it is important to understand what is driving moves of this magnitude, especially when they are as large and rapid as these have been.

At the same time, concerns in the semiconductor credit market have eased, with Nvidia’s CDS spread tightening to 67 basis points from its July 29 peak of 80 basis points. For now, the concerns that had been weighing on the credit market appear to have subsided.

Today, the VIX1D fell to a low of 6.75, and there is little room left for this measure of implied volatility to fall further. It is more likely than not that it moves higher from here and is closer to 15 or 20 by the end of the day on Thursday than it is to remain below 9.

Bond market volatility eased somewhat today, but only modestly. Measures of stock and bond market volatility have historically tended to move together over time, and the divergence between the two remains notable.

The 10-year Treasury yield fell by nearly 4 basis points today to finish at 4.68%. Today’s ISM Manufacturing report did little to push rates higher, and tomorrow’s JOLTS report will be followed by additional employment data later in the week. The 10-year appears to be positioned for a breakout above the current 4.70% area, but it will likely need a meaningful catalyst before that happens.

-Mike

Michael Kramer and the clients of Mott Capital own MSFT and AMZN

Glossary by ChatGPT

• Basis Point (bp): One one-hundredth of a percentage point, commonly used to measure changes in interest rates or yields.

• CDS Spread: The cost of credit default swap protection, often used as a measure of perceived credit risk.

• Implied Volatility: The market’s expectation of future price fluctuations as reflected in option prices.

• ISM Manufacturing Report: A monthly survey of U.S. manufacturing activity that serves as a widely followed economic indicator.

• JOLTS Report: The Job Openings and Labor Turnover Survey, which measures labor demand and workforce turnover in the U.S.

• Mega-Cap Stocks: Companies with exceptionally large market capitalizations, typically among the largest publicly traded firms.

• Options Flows: Buying and selling activity in the options market that can influence trading in the underlying securities.

• Semiconductor Credit Market: The market’s assessment of credit risk for companies operating in the semiconductor industry.

• S&P 500: A benchmark index tracking 500 of the largest publicly traded U.S. companies.

• VIX1D: The Cboe One-Day Volatility Index, measuring the market’s expectation of S&P 500 volatility over the next trading day.

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.

This week’s economic data probably takes on added importance given the recent surge in interest rates. The ISM Manufacturing report is due on Monday, followed by JOLTS on Tuesday, ADP employment and the ISM Services report on Wednesday, productivity and unit labor costs on Thursday, and, of course, the jobs report on Friday.

As if that weren’t enough, the Quarterly Refunding Announcement also comes on Monday. It will tell us about the government’s borrowing needs for the rest of the year and, perhaps more importantly, the composition of how it plans to finance them. Given the surge in long-end rates, it seems unlikely to me that the Treasury will suddenly shift from heavy bill issuance to greater coupon issuance. I would expect bill issuance to remain the primary source of funding.

The jobs report is expected to show that 83,000 jobs were created in July, up from 57,000 in June. One thing worth pointing out is that the Revelio Labs job data is released the day before. That data has shown a solid improvement in U.S. hiring trends over the past couple of months and appears to lead both the BLS and ADP data by a few months. So it’s worth keeping an eye on that release on Thursday.

The Employment Cost Index rose more than expected for the second quarter when it was reported on Friday, increasing 0.9% versus expectations of 0.8%. Historically, there has been a relationship between the Employment Cost Index and the 10-year Treasury yield, so it may have partially contributed to the move higher in rates on Friday.

The 10-year Treasury yield finds itself at a very important inflection point as it pushes up against resistance in the 4.7% to 4.8% range. A break above that area would open the door to the October 2023 high near 5%. In that sense, this is shaping up to be a critical week for bonds and interest rates.

Single-stock volatility fell sharply this week and should continue to decline as earnings season progresses. Implied volatility typically rises ahead of earnings reports and falls afterward, and that should lead to a further decline in the VIXEQ.

This could also result in the spread between the VIXEQ and the VIX Index narrowing, although it is unclear by how much. There used to be a well-defined range for this spread, but over the years it has widened, and its baseline has gradually moved higher. As a result, the spread may not have as much room to contract as it once did.

When viewed as a ratio, however, the distortion is not nearly as pronounced, suggesting there is still quite a bit of contraction ahead.

The median implied volatility and skewness for the top 50 stocks in the S&P 500 have both declined, but implied volatility for the index has fallen even more. That is likely why implied correlations have not increased.

However, index volatility may have a harder time falling further, especially if volatility in the bond market continues to rise, as it has recently. Typically, when implied volatility in the bond market increases, implied volatility in the equity market rises as well.

Additionally, with this week’s calendar packed with major macroeconomic events, the VIX is likely to move higher heading into those releases. As a result, I would expect implied correlations to begin rising this week, which could keep pressure on risk assets.

-Mike

Glossary by ChatGPT

• ADP Employment Report — A monthly estimate of U.S. private-sector employment published by ADP ahead of the official jobs report.

• BLS (Bureau of Labor Statistics) — The U.S. government agency responsible for producing employment, inflation, and other key economic statistics.

• Coupon Issuance — The sale of longer-term Treasury notes and bonds that pay periodic interest to investors.

• Employment Cost Index (ECI) — A quarterly measure of changes in wages, salaries, and employer benefit costs across the U.S. economy.

• Implied Correlation — A market-derived estimate of how closely the prices of individual stocks are expected to move together.

• Implied Volatility — The market’s expectation of future price fluctuations as reflected in option prices.

• Index Volatility — The expected future volatility of a market index derived from its option prices.

• ISM Manufacturing Index — A monthly survey measuring business conditions and activity in the U.S. manufacturing sector.

• ISM Services Index — A monthly survey tracking business activity in the U.S. services sector.

• JOLTS (Job Openings and Labor Turnover Survey) — A monthly report measuring job openings, hiring, and separations across the U.S. labor market.

• Median Implied Volatility — The midpoint implied volatility reading across a group of securities, reducing the impact of outliers.

• Productivity — A measure of economic output produced per hour worked.

• Quarterly Refunding Announcement (QRA) — The U.S. Treasury’s quarterly update outlining its borrowing plans and the mix of securities it expects to issue.

• Revelio Labs — A labor market analytics firm that uses alternative employment data to track hiring and workforce trends.

• Risk Assets — Investments such as equities, high-yield bonds, and commodities whose prices are more sensitive to economic and financial conditions.

• Single-Stock Volatility — The expected price fluctuation of an individual company’s shares, typically measured using options.

• Skewness — The relative difference in implied volatility across option strike prices, often reflecting demand for downside protection.

• Unit Labor Costs — The average labor cost required to produce one unit of economic output.

• VIX Index — The CBOE Volatility Index, commonly viewed as the market’s expectation of near-term volatility for the S&P 500.

• VIXEQ — An implied volatility index based on individual S&P 500 constituent options, often used to compare single-stock volatility with index 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.

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.

The biggest piece of news this week was the FOMC meeting and the press conference, which didn’t reveal a lot, but revealed enough. The market got a hint of what was being implied, and it resulted in long-end rates rising rather dramatically. The 30-year yield broke out this week, surpassing the 2023 highs, and we’re now looking at levels we haven’t seen since 2008. This region has been an important area of support and resistance historically, and if we were to break out from here, the 30-year could start heading toward the 6% area. We’re already at 5.25%, so 6% doesn’t seem as far-fetched as it did a couple of weeks ago.

What was really different about this meeting was the absence of pushback. Typically, when long-end rates have risen too much, the Fed has leaned against it. In late 2022, the cumulative effects of tightening financial conditions worked their way into the Fed’s language, giving the bond market the heads-up, and rates came down. The same thing happened in November 2023. This time, Chair Warsh almost applauded the rise, noting that they didn’t have to raise rates because the market raised rates for them. I’ve often thought the reason the Fed hasn’t been able to get back to its 2% mandate is that long-end rates haven’t risen enough, because the long end has far more impact on borrowing costs for consumers and businesses than the overnight rate does.

The term premium (the extra compensation investors demand to own longer-dated Treasuries) has also begun to move higher after being stuck around 75 basis points since May 2025. Historically, that is still fairly low, so it’s quite possible investors will continue to demand more compensation for owning Treasuries, which would push rates higher as well. This week also brings the quarterly refunding announcement, which has probably gone a little under the radar. It doesn’t necessarily have a big market impact, but if the Treasury starts shifting issuance away from bills and toward the long end of the curve, that could add another source of upward pressure on rates. There are also still a lot of Treasury bills settling, with roughly another $100 billion this week alone.

Bond market volatility has started to rise too. The VXTLT, which I find a really useful intraday proxy for the long end since the MOVE index isn’t visible until the end of the day, moved up notably. That matters because implied volatility on bonds and implied volatility on stocks pretty much go hand in hand, and the big move down in equity implied volatility on Thursday and Friday certainly does not match the big move up in the VXTLT. When the MOVE index is rising, stock prices tend to fall, because rising bond volatility can contract multiples and lead to credit spreads widening. If you invert the HYG, it trades right along with bond market volatility, though the VXHYG actually came down a little on Thursday and Friday.

Meanwhile, dispersion has started coming down now that we’re past the heart of earnings season, and as dispersion falls, correlations should rise. When you take dispersion minus the 3-month implied correlation index, you get what I think is a useful proxy for where markets are likely to go, and it could be telling us the move we saw Thursday and Friday may not be for keeps. The recent yen strength matters here too: the USD/JPY and the implied correlation index have been basically mirror images since March 2023, so if the yen keeps strengthening, that could push correlations higher, which we know tends to weigh on equities. The Korean won is worth watching as well, since USD/KRW has traded closely with the semiconductor stocks and the KOSPI, and South Korean money in US markets has grown from around $200 billion to around $800 billion over the last year and a half. If the won continues to strengthen, unhedged holders start losing on the currency side, and that could be another potential headwind over the next couple of weeks.

Video

Glossary by Claude

• Term premium: The extra yield investors demand for holding longer-dated Treasuries instead of rolling short-term bills.

• Quarterly refunding announcement (QRA): The Treasury’s quarterly statement on how much debt it will issue and in which maturities.

• VXTLT: An index measuring implied volatility on the TLT long-term Treasury bond ETF, useful as an intraday proxy for bond market volatility.

• MOVE index: A widely followed measure of implied volatility across the Treasury market, published at the end of the day.

• Dispersion (DSPX): A measure of how much single-stock volatility exceeds index-level volatility; it tends to fall after earnings season.

• Implied correlation: An options-derived measure of how much stocks are expected to move together; rising correlation is typically associated with weaker equity markets.

• Carry trade: Borrowing in a low-yielding currency, such as the yen, to invest in higher-yielding assets; it can unwind when the funding currency strengthens.

• Bear steepener: A yield-curve move where long-term rates rise faster than short-term rates.

Disclaimer

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.

The move in the markets today was somewhat surprising, given the size of the rally in a few names, along with what appeared to be intervention in the Japanese yen ahead of tonight’s BOJ meeting. Additionally, the Korean won continued to strengthen, despite it being a mild Treasury settlement day. Sometimes, however, news flow can be more powerful than mechanical flows, and today was one of those days.

The more interesting point, I suppose, is that the index has now been stuck below 7,450 since July 23, and that has remained the key level of resistance. At this point, a strong gap higher that clears resistance could lead to a rally back toward 7,500, ultimately filling the gap created by the decline on July 22.

One thing worth noting is that today’s rally created a gap of its own following yesterday’s sharp drawdown. In my view, those types of gaps are typically unstable and tend to fill relatively quickly.

Perhaps what matters just as much is that USD/JPY weakened materially today, in what appeared to be intervention, oddly ahead of tonight’s BOJ meeting. A surprise rate hike by the BOJ would likely be another shock to the market at this point and could lead to even further yen strength.

Since 2023, the 3-month implied correlation index and USD/JPY have been almost mirror images of one another. If that relationship continues to hold, it would suggest that implied correlation is poised to rise. That, in turn, would likely pressure dispersion lower and could weigh on the broader equity market.

Additionally, USD/KRW continued to weaken today as well, making the rally in the semiconductor sector somewhat unusual. No relationship lasts forever, but this has been a very strong signal over the past several weeks.

If the market has been largely driven by liquidity, and that liquidity is now being withdrawn, then the signal from the FX market does not support today’s move.

-Mike

Glossary by ChatGPT

• BOJ (Bank of Japan): Japan’s central bank, responsible for setting monetary policy and interest rates.

• Dispersion: An options strategy or market condition that benefits when individual stocks move independently rather than in unison.

• Gap: A price area on a chart where no trading occurred between consecutive sessions, often acting as future support or resistance.

• Implied Correlation Index: An options-derived measure estimating how closely stocks within an index are expected to move together.

• Liquidity: The availability of capital and ease with which assets can be bought or sold without significantly affecting prices.

• Mechanical Flows: Market movements driven by systematic trading, rebalancing, or quantitative strategies rather than discretionary investors.

• Resistance: A price level where selling pressure has historically been strong enough to limit further gains.

• Treasury Settlement Day: The scheduled date when newly issued U.S. Treasury securities are paid for and delivered, which can temporarily affect market liquidity.

• USD/JPY: The exchange rate between the U.S. dollar and Japanese yen, often viewed as an important indicator of global risk sentiment and monetary policy expectations.

• USD/KRW: The exchange rate between the U.S. dollar and South Korean won, frequently monitored as a gauge of Asian capital flows and semiconductor-related market trends.

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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A very strange post-meeting reaction from the market following Wednesday’s Fed meeting. The front end of the Treasury curve rallied sharply, with September rate hike expectations largely priced out of the swaps market. At the same time, the long end of the curve sold off aggressively. The spread between the 30-year Treasury yield and the 3-month Treasury bill widened by roughly 20 basis points on the day to 1.43%—a massive steepening move.

The interesting takeaway from today’s meeting is that the long end of the Treasury curve clearly got the message: the Fed is not going to stand in its way. Warsh acknowledged that both nominal and real yields have risen sharply since the June meeting, suggesting the Fed is watching the market and recognizing that financial conditions have already tightened significantly.

That is important because it allows the Fed to avoid raising the policy rate further. In effect, the market is doing the tightening for the Fed, and that is ultimately what matters. If the Fed is no longer relying on forward guidance and is instead allowing the market to dictate the narrative, then long-term interest rates can adjust to levels that appropriately compensate investors for inflation while allowing the yield curve to steepen naturally.

The yield curve remains historically flat, and that has been one of the reasons Powell and his colleagues struggled to bring inflation back to target. Long-term interest rates were never allowed to rise sufficiently relative to short-term rates, preventing the yield curve from steepening in a way that would have produced more restrictive financial conditions.

In the meantime, the S&P 500 has entered the danger zone, closing at 7,315. The options put wall sits at 7,300, a level that could provide support if it holds. That is where put holders may choose to monetize their positions and unwind hedges, potentially helping to stabilize the market. However, a break of support does open the gates to significantly lower levels.

The market has also moved into negative gamma, meaning market maker hedging flows become directional and can amplify price swings. As a result, volatility is likely to increase, with market moves becoming larger in either direction.

Below that, technical support shows around 7,250 and 7,130.

-Mike

Glossary by ChatGPT

• Financial conditions — The overall ease or difficulty of borrowing and investing, influenced by interest rates, credit spreads, equity prices, and the U.S. dollar.

• Negative gamma — A market condition where dealer hedging activity tends to reinforce price moves, increasing market volatility.

• Nominal yield — The stated yield on a bond before adjusting for inflation.

• Options put wall — A price level with significant put option open interest that can act as potential market support due to hedging activity.

• Policy rate — The benchmark short-term interest rate set by a central bank to influence economic activity and inflation.

• Real yield — A bond yield adjusted for expected inflation, representing the inflation-adjusted return.

• Swaps market — The market where participants trade interest rate swaps, often used to infer expectations for future central bank policy.

• Treasury curve — The relationship between U.S. Treasury yields across different maturities.

• Yield curve steepening — A widening gap between long-term and short-term interest rates, typically driven by rising long-term yields, falling short-term yields, or both.

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.