Market Liquidity and Volatility Converge

It feels like one of those moments when the anticipation becomes almost overwhelming — you just want the event to happen. For me, that moment arrives in a few days, as Treasury settlements continue to drain liquidity from the market, the Reverse Repo facility falls from its current $50 billion level, and reserves begin to decline as the Treasury issues its full slate of T-bills.

To be clear, this is not a call for a market crash. However, if liquidity has been the key driver of recent gains, the coming days should offer a clear read on where conditions truly stand. As of August 12, the TGA sits around $550 billion and still needs to rise to $850 billion.

Realized and implied volatility are converging, with 10-day realized volatility now above the 9-day VIX, while 21-day realized volatility and the VIX continue to move toward one another.

This likely explains why the VVIX rose today, climbing above 98. If the VVIX continues to rise, it would signal that the VIX is likely to follow.

The DJIA is now approaching a potential breakout. Resistance at 45,000 has been a major hurdle since January, and this marks the fifth attempt to clear it. Whether it succeeds this time remains uncertain. More importantly, the setup highlights the divergence between the S&P 500’s heavy dependence on Nvidia and an average like the Dow, which is not reliant on Nvidia's performance.

Mike

Terms By ChatGPT

Defined Terms and Jargon

• Treasury Settlements – The process by which the U.S. Treasury finalizes payments for newly issued securities, affecting liquidity in the financial system.

• Reverse Repo Facility (RRP) – A Federal Reserve tool that allows eligible financial institutions to lend cash to the Fed overnight in exchange for securities, impacting short-term interest rates and liquidity.

• Reserves – Deposits held by commercial banks at the Federal Reserve, which influence overall market liquidity.

• T-Bills – Short-term U.S. Treasury securities with maturities of one year or less, used for government funding.

• TGA (Treasury General Account) – The U.S. Treasury’s account at the Federal Reserve, used to manage government cash flow.

• Realized Volatility – A measure of actual market price fluctuations over a past period.

• Implied Volatility (VIX) – A forward-looking measure of expected market volatility, derived from option prices on the S&P 500.

• VVIX – An index measuring the implied volatility of the VIX itself, often considered a “volatility of volatility” gauge.

• DJIA (Dow Jones Industrial Average) – A stock market index tracking 30 large U.S. companies, often seen as a barometer of broader market health.

• Resistance Level – A price level at which a security or index historically struggles to rise above due to selling pressure.

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