Mechanical Factors — Not Fundamentals — May Be Driving This Rally
Here is Saturday’s free version of Navigating The Market membership content. I hope you enjoy it…
Saturday, April 18, 2026
Catalysts Ahead
Mega-cap earnings over the next 1-2 weeks — historically, when the dispersion trade unwinds
Monday watch: Will SOFR stay above IORB, or come back down?
April OPEX is behind us — gamma/delta levels resetting in the marketplace
What’s on the Radar (Mike’s Mechanical Framework)
Dispersion trade cycle — increases ~3-4 weeks before earnings, unwinds after. Currently in the peak phase.
Systematic funds positioning — Typically long single-stock vol, short index vol. for dispersion trade. Unwinds after earnings.
CTA flows — triggered by the rally; heavy put concentration likely unwound.
Liquidity — TGA drain was a tailwind last 2-3 weeks; reversing now.
Key Takeaways
Two-Week Rally Attributed to Mechanical Factors, Not Fundamentals: The S&P’s two-week turnaround may be due to a stack of four drivers — TGA-drained liquidity, the volatility-dispersion trade, CTA flow triggering, and put-concentration unwinding — rather than a fundamental re-rating.
DSPX Minus 3-Month Correlation Spread at Historic Wides: The spread between the dispersion index and 3-month implied correlation has widened from 13.6 at the start of April to 22 today — near record highs historically and a classic sign of the seasonal dispersion trade into earnings.
Liquidity and OPEX Now Turning the Other Way: TGA refilling, nearing ~$1 trillion, with reserves back under $3 trillion; SOFR has traded above IORB for the last two days. April OPEX is behind us, so gamma/delta are resetting. Mike is “very suspicious” of the current rally given the mechanical setup.
Video
Commentary
Transcript Edited by Claude (Can Make Mistakes)
Markets have had quite a big turnaround over the last two weeks or so, with a big rally in the S&P. There are a number of different mechanical factors at play here that may or may not continue to play out into the future. I think it’s important to focus on the things I’ve been trying to point out — forgetting about the price action on a daily basis — and recognize that there was a pretty decent amount of liquidity that came into the marketplace over the last few weeks with the TGA running down.
Liquidity — TGA Refilling, Reserves Dropping
Reserve balances really ticked up during the drain. Now that is going to change. The TGA has risen back up toward about a trillion dollars, and we’ve seen reserves come down to under three trillion again. So what this lays out to me is that there was a decent amount of liquidity available to the market over the last couple of weeks that probably added some buoyancy to it. I generally think some of those liquidity trends are going to reverse as we move forward.
The Volatility Dispersion Framework
We’re at a different sort of point in time when it comes to where we are with the marketplace. Anyone who’s been an observer of this channel for some time knows that we’ve used volatility dispersion and volatility metrics in the past very well to call market timing points where we’ve seen and expected reversals of trend. Typically around earnings season — as I’ve talked about in the members area — we’re right now in the middle of a volatility dispersion type of season. Basically, this is when constituent volatility rises and index-level volatility tends to decline.
Over the last two weeks or so, the VIX basically dropped from around thirty down to around seventeen. Meanwhile, the VIX constituent index — which measures the average implied volatility of single stocks — has really not moved very much, basically going from a high of about forty-five to only forty.
So what that’s done is created a spread where the VIX constituent volatility index has stayed elevated while the VIX index dropped. That’s created a very wide spread between the two. It went from around thirteen-point-six at the beginning of April as high as twenty-four to twenty-five. Now we’re sitting up here at twenty-three. This is historically one of the widest the spreads have ever been.
This is a sign of the dispersion trade. The DSPX — the dispersion index — we’ve talked about this rather notably in the past. It’s a seasonal thing we tend to see around earnings season. What I’ve observed over the years is that dispersion increases as you get to about three weeks to a month away from earnings season, and then once earnings season is over, the dispersion index slowly unwinds and comes down.
It explains some of what we’re seeing in some of these stocks over the last couple of weeks — Meta just suddenly ripping, Tesla. What this is, in my view, is the classic sort of volatility-dispersion trade that we tend to see around this time of the year. Typically what that entails is that systematic funds get long individual stock volatility and at the same time get short index volatility. They’re basically creating an option position that neutralizes and lets them just focus on the volatility. The idea is you short index vol and that’s how you make your return on a very simplistic level. I’m not going to get into all the details because it’s quite complex.
This is what explains a lot of the movements we tend to see in stocks especially around earnings season. This actually happened at the end of January — Meta basically did the same thing. It carried forward after they reported, but all of that was given back fairly quickly. This tends to happen on a somewhat regular quarterly basis.
Where Correlations Are
So we’re very much in the same realm right now, meaning dispersion is very high and stocks are kind of acting independently of one another. Correlations are extremely low. The one-month implied correlation index is back down to around ten. The three-month implied correlation index is back at fourteen.
What I like to do — and what I explain in the members areas — is take the dispersion index and subtract the three-month implied correlation index from it. That creates another sort of spread, and when I add the S&P 500 to the chart, it identifies a lot of what’s going on in the marketplace. You can clearly see that as the S&P has been rising, the dispersion trade has been getting quite strong and quite elevated.
What Drove the Rally
So a lot of what we’re seeing in the market taking place right now has to do with dispersion — which ultimately led to CTA flows getting triggered, which ultimately led to some of these puts, the heavy put concentration in the option market, probably getting unwound. You had basically three or four different things going on simultaneously that led to this big explosive move.
The way I’m thinking about it, and the way I’m trying to explain it — I genuinely enjoy doing this and sharing my knowledge base with people. I get criticized when I’m wrong, but that’s unfortunately part of the game when you put yourself out there. What I’m trying to do here is just explain what I think is going on in the marketplace at this point in time.
It’s not to say the market is due to crash. I don’t know what the future holds. But what it probably tells me is that right now some of these stocks have had pretty big moves and they may not really be deserving of them. Those moves may get given back over the next couple of weeks as earnings start coming out and the dispersion trade starts getting unwound. Plus, obviously, there’s a lot of uncertainty happening around the world, and it seems like the news on Saturday, April eighteenth, is very different from the news we were hearing on Friday, April seventeenth, when it comes to the geopolitical tensions.
What’s Ahead
If I was trying to break down what I think going forward looks like — number one, we know that once mega-cap earnings report over the next week or two, the dispersion trade tends to unwind itself. It’s done that rather notably and regularly on a seasonal basis.
The other part we know is that the TGA has been refilling and it’s elevated now. It’s likely to stay elevated for a few weeks. That’s going to potentially be a drain on some liquidity. It’s already started to show slightly in the overnight funding markets, where SOFR has gone back above IORB for the last couple of days — back to over positive two. Maybe that value comes down on Monday. But once it gets elevated, that’s telling you liquidity is getting a little bit thinner and tighter in the overnight markets. An important gauge to keep an eye on during the week.
Right now, it’s a very tough environment, and momentum begets more momentum. Now that April OPEX is kind of behind us, the gamma and delta levels are all going to start resetting in the marketplace as well. So it’s possible a lot of this move isn’t the way it’s been billed out to be.
Only because I’ve seen this happen so many times before when it comes to the dispersion trade going into earnings, I’m very suspicious of what we’re seeing taking place in the market right now. And I think mechanically, it really ties back to that.
Defined Terms
TGA (Treasury General Account): The U.S. Treasury’s checking account at the Fed; when TGA rises, bank reserves fall, tightening system liquidity.
Reserve Balances: Commercial-bank deposits at the Fed; higher reserves generally ease funding conditions.
DSPX (Dispersion Index): A Cboe measure of expected dispersion across S&P 500 constituents; high values indicate single-name vol is being bid relative to index vol.
Implied Correlation Index (COR1M, COR3M): A Cboe measure of the correlation implied by index-option vol versus single-name option vol; low values indicate stocks trading independently.
Dispersion Trade: A systematic strategy of being long single-stock vol and short index vol; profits when constituents move more than the index on average.
CTA (Commodity Trading Advisor): Systematic trend-following funds whose rules-based buying or selling can amplify directional moves.
Gamma / Delta Positioning: Aggregate options exposure of dealers; positive gamma dampens moves, negative gamma amplifies them.
OPEX (Options Expiration): Monthly or quarterly settlement date; gamma and delta positioning typically reset in the days after.
SOFR / IORB: SOFR is the Secured Overnight Financing Rate; IORB is Interest on Reserve Balances. When SOFR trades above IORB, overnight funding is getting tighter.
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.
at the moment TGA went up to 971B from 926B, SOFR dropped from 3.75 to 3.67. seems there other factors impact liquidity in addition to the treasury issurances & TGA