It was a relatively quiet day of trading. The early morning strength faded by midday, leaving the S&P 500 up just 26 bps. Tomorrow will be more important, with the JOLTS report in the morning and about $100 billion in Treasury settlements, which could put downward pressure on markets if liquidity needs to be raised.
Dispersion remained the theme, with the Dispersion Index still elevated. While it could rise further, it’s something to watch—high dispersion typically coincides with low correlations.
At 10.5, the 1-month implied correlation index is very low.
Individual stock implied volatility has also risen sharply in recent weeks, reflecting the broader market’s elevated dispersion, which remains intact.
In the meantime, realized volatility has remained relatively unchanged over the past couple of days and remains very low. Taken together, this leaves the market in a fairly vulnerable position.
I wish there were more to say, but end-of-quarter rebalancing may be influencing moves in rates and FX, and I don’t think that’s worth reviewing at this time. Based on today’s levels for the TGA and reverse repo, I estimate reserves are around $2.9 trillion. While they should rebound somewhat on Wednesday, liquidity is clearly not as ample as it has been, and over time, reserves are likely to keep contracting until the Fed ends QT.
If overall market breadth is any indication of these lower liquidity levels, then the Summation Index, which is likely to decline again today, is a prime example.
-Mike
Glossary by ChatGPT
Dispersion Index: A measure of the degree to which individual stock returns differ from each other within a market index.
Implied Correlation Index: A gauge of how closely individual stock options imply stocks will move together, with lower levels signaling weaker correlations.
Implied Volatility: The market’s forecast of a stock or index’s future volatility derived from options pricing.
JOLTS Report: The Job Openings and Labor Turnover Survey published by the U.S. Bureau of Labor Statistics, providing data on job vacancies, hires, and separations.
Liquidity: The ease with which assets can be bought or sold in the market without significantly impacting prices.
QT (Quantitative Tightening): The process by which the Federal Reserve reduces its balance sheet, typically by letting bonds mature without reinvestment, decreasing liquidity.
Realized Volatility: The actual observed volatility of a security or index over a specific time period.
Reverse Repo: A transaction in which the Federal Reserve sells securities with an agreement to repurchase them later, used to manage short-term interest rates and liquidity.
Summation Index: A breadth indicator based on the cumulative total of daily net advances, used to measure market strength or weakness.
TGA (Treasury General Account): The U.S. Treasury’s operating cash account at the Federal Reserve, used to manage federal payments and receipts.
Treasury Settlements: Payments made when U.S. Treasury securities are issued or mature, affecting system-wide liquidity.
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