Negative Gamma Regime And Liquidity Strains Drive Market Volatility

Outlooks

Short-Term Stock Outlook –

• Liquidity: Reverse repo facility depleted; upcoming Treasury settlements could push reserve balances down to ~$3T or lower through September.

• Volatility: With August OPEX behind us, implied vol can expand — VIX bias higher.

• S&P 500: Break below 6,390 sets up a move toward 6,225.

• RSP vs. SPY: Equal-weight (RSP) expected to outperform SPY.

• Nasdaq/QQQ: QQQ has the potential to fall to $550, aligning with NDX at 22,750.

Long-Term Stock Outlook –

• Bubble Case (Risk/Stretch): If P/E expands to 25x NTM EPS, mirroring the 1999–2000 tech bubble, S&P 500 could reach 7,100.

• Base Case (More Likely): Slower growth vs. 2000/2021 bubbles suggests more reasonable 17.5x 2026 EPS, implying 4,800–5,000 range.

• Risk Skew: Market upside limited by fundamentals; froth depends on liquidity conditions and investor risk appetite.

Rates and FX Outlook:

• Fed Policy (Base Case): Fed cuts 150–200 bps over the next year, bringing Fed Funds to 2.5%–3.0%, based on Fed Funds Futures. Risk Case: If inflation proves sticky, cuts are slower, keeping policy restrictive longer.

• 10Y Yield (Base Case): Supported near 4%, with upside potential toward 5%+. Risk Case: Global growth shock (recession) could drag yields back toward 3.5%–3.7%.

• 2Y Yield (Base Case): Vulnerable to weak data; break below 3.6% opens path to mid-2% range. Risk Case: Resilient economy keeps 2Y pinned closer to 4%+.

• FX Impact (Base Case) : Stronger yen likely; USD/JPY could break below 140. Risk Case: BOJ does not hike rates, sending USD/JPY Back Over 150.

Daily

Stocks are trading mostly lower today, continuing yesterday's sell-off. The S&P 500 is still in a negative gamma regime, which means that market makers are trading directionally with the market rather than acting as a stabilizing force.