Takeaways
Implied correlation and dispersion levels may soon revert to the mean, triggering a sharp downside in the S&P 500.
Watch Equity Financing futures contracts tied to SOFR and EFFR for signals on funding conditions, as recent declines suggest weakening support for equities.
There isn’t much to say at this point—it was a boring day. No economic data was released, so rates essentially did nothing, and the stock market remained pinned at 6,720 all day, thanks to the 0DTE gang. Implied correlations were slightly higher, while dispersion was down slightly. Ultimately, these measures will need to revert to the mean because both are at extremes, with high dispersion and low correlations, which means the S&P 500 is due to drop sharply.
More interesting is that equity financing costs, which briefly rose in September, are now starting to pull back again. It has been some time since we last discussed these futures contracts, as they have been fairly inactive. They perked up in early September, but are once again starting to decline in value, as noted by the BTIC-adjusted December 2025 EFFR contracts.
We have also seen these BTIC S&P 500 Total Return Futures for December 2026 vs. SOFR begin to decline sharply, too.
Finally, equity repo usage declined through September 24, and since financing costs and repo usage have tended to move in tandem over time, a further decline in financing costs will likely result in a corresponding drop in repo usage as well.
Add these to the growing list of reasons stocks shouldn’t be rising, along with private equity firm Apollo Global—whose stock is also in decline—along with several others.
Take care, you can watch a video on the above here.
-Mike
Glossary by ChatGPT
0DTE (Zero Days to Expiration): Options contracts that expire the same day they are traded, often used for short-term market positioning.
BTIC (Basis Trade at Index Close): A futures trading mechanism allowing participants to execute trades at the closing index level, adjusted by a spread.
Dispersion: A measure of how much individual stock returns differ from the index return, with high dispersion indicating greater variation among components.
EFFR (Effective Federal Funds Rate): The weighted average interest rate at which banks lend reserves to each other overnight.
Equity Repo: A repurchase agreement using equities as collateral, allowing investors to borrow cash or securities.
Implied Correlation: An options-derived metric estimating how much individual stock movements are expected to align with each other within an index.
SOFR (Secured Overnight Financing Rate): A benchmark interest rate for U.S. dollar-denominated derivatives and loans, based on overnight Treasury repo transactions.
Disclosure
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