Market Divergence Widens As Liquidity Evaporates
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN AMZN LONG-TERM
The S&P 500 finished the day down about 1%, while the Equal Weight Index declined roughly 0.43%. This continues to reflect what we’ve been discussing in recent weeks — the growing divide between the tech-heavy segment of the market and everything else, driven, I believe, by insufficient liquidity to support broad participation across all sectors at once.
Speaking of liquidity, the reserve balance fell again this week, ending at $2.83 trillion as the TGA continues to climb, draining reserves from the system. Tomorrow marks both the month-end and a $58 billion Treasury settlement date, and I would expect overnight funding pressures to be fairly tight, with increased usage of the Standing Repo Facility.
In the meantime, the VIX actually closed lower on the day. But more importantly, the dispersion index fell and implied correlation rose — exactly what we’d expect now that earnings from the major stocks are out. I would expect this trend to continue tomorrow and into next week. As the spread contracts, the S&P 500 typically declines, and that’s what I anticipate happening going forward.
Amazon is trading higher after hours, but the problem is that the call wall sits at $250. The $250 calls expiring tomorrow closed today at $0.83, down from $2.17 on Wednesday. With the stock trading around $251 after hours, those calls still aren’t worth much and will likely be dumped, which could cause the stock to give back a good portion of its after-hours gains.
Sorry, I have had a busy day and would really just like to keep this short.
-Mike
Glossary by ChatGPT
Call Wall — A concentration of call option open interest at a specific strike price that can act as a resistance level for the underlying stock.
Dispersion Index — A measure of how differently individual stock prices move relative to each other within an index.
Equal Weight Index — A version of an index in which all components are given the same weighting, regardless of market capitalization.
Implied Correlation — An options-based measure of how closely stocks within an index are expected to move together.
Liquidity — The availability of cash or easily tradable assets in the financial system or market.
Standing Repo Facility — A Federal Reserve tool that allows eligible institutions to borrow cash overnight using Treasury securities as collateral.
TGA (Treasury General Account) — The U.S. Treasury’s main account at the Federal Reserve, used to manage government cash flows.
Treasury Settlement — The date when purchased Treasury securities are exchanged for cash between buyers and the U.S. Treasury.
VIX (Volatility Index) — A measure of the market’s expectation of near-term volatility, derived from S&P 500 options prices.
Disclosure
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