Liquidity Drain Sinks Stocks on February 12
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Due to the mid-winter recess, this free evening commentary will not be published the week of February 16, and will return on February 22. However, I will continue to provide daily updates in the paid membership area to the best of my ability. At least the market is closed on Monday.
Stocks fell sharply today, with the S&P 500 dropping nearly 1.6% and the NASDAQ 100 declining more than 2%. Today was also a settlement day, with $22 billion settling, so the sell-off wasn’t particularly surprising. Since the end of October, settlement days have been weak more often than not.
Next week may not be any better, with $65 billion due to settle on Tuesday, and another $24 billion on Thursday.
Suddenly, social media has decided that dispersion in the index is a problem, as stocks are starting to break down and post large moves. It’s a bit of a “no kidding” moment — where has everyone been for the past six months? I guess people are just now waking up.
The Dispersion Index has been trading near the upper end of its historical range for several weeks, so this is hardly a new development.
I don’t want to point out the obvious, but Walmart is reporting results next, and this whole little spot-up, vol-up stuff is probably going to end in a not-so-pleasant way.
Last year, when this same thing happened, the stock fell 12.5%.
With the VIX 1-Day closing at 21.5, it wouldn’t be surprising to see the S&P 500 rally by around 1%. At these elevated IV levels, a sharp downside move in the SPX would be somewhat unexpected.
In addition, tomorrow is Friday and the start of a holiday weekend, which is often a period when volatility sellers step in, potentially adding support to the market.
Anyway, I will try to post something on Saturday. If not, have a good week.
-Mike
Glossary by ChatGPT
Dispersion Index: A measure of the variation in performance among individual stocks within an index, often associated with higher single-stock volatility.
Implied Volatility (IV): The market’s forecast of a security’s potential price movement derived from options pricing.
NASDAQ 100: A stock market index composed of 100 of the largest non-financial companies listed on the Nasdaq exchange.
S&P 500: A broad U.S. equity index tracking 500 large-cap publicly traded companies.
Settlement Day: The date when a securities transaction is finalized and cash and securities are officially exchanged.
SPX: The ticker symbol for options based on the S&P 500 Index.
VIX 1-Day: A short-term volatility index measuring the market’s expectation of S&P 500 volatility over the next trading day.
Volatility Seller: A market participant who sells options or volatility-based products, typically aiming to benefit from declining implied volatility.
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