Stocks Advance Despite Rising Oil and Higher Rates
There is much more in the member section today:
Stocks managed to finish the day higher even as the dispersion trade appeared to cool, credit spreads widened, and oil prices rose. With options expiration tomorrow, it is likely playing a role in the recent upside, particularly as the market has shifted from short-delta to long-delta positioning. This transition suggests that put positions were unwound quickly and aggressively, driving a significant dealer hedge unwind that helped lift the market.
Layered atop the dispersion trade that has been in force over the past week, these dynamics appear to have contributed to the sharp rally. At this stage, given the combination of these factors, the move is becoming increasingly difficult to sustain.
(Data from Optionschart.io)
After tomorrow, a significant amount of gamma and delta will roll off, which should lead to a moderation in the flows observed over the past several days—at least from an options market perspective.
We also saw the dispersion index decline today as implied correlations moved higher—another key relationship I monitor closely when assessing dispersion and its potential market impact. One day does not establish a trend, but the move lower is notable, particularly if it continues in the days ahead.
In the meantime, the 30-year Treasury yield is moving higher again, now back to 4.94% and testing the upper end of its range near 5%—a level it has repeatedly failed to break above. Perhaps the fifteenth time will be the charm.
Meanwhile, the dollar is beginning to find support near the 50% retracement level around 98.20. For now, the RSI remains higher, and as long as that holds, there is a chance the dollar can continue to strengthen.
In the meantime, the oil market has returned to a more typical structure, with Brent once again trading above WTI. More notably, Brent has held support around the $94 level, appears to have broken out of a downtrend, and is now attempting to push above its 10- and 20-day exponential moving averages. There is a technical case to be made for higher oil prices.
Let’s see what tomorrow will bring
-Mike
Glossary by ChatGPT
Credit Spreads: The yield difference between corporate bonds and comparable government securities, reflecting perceived credit risk.
Delta: A measure of an option’s sensitivity to changes in the price of the underlying asset.
Dispersion Trade: A strategy that exploits differences between index volatility and the volatility of individual components.
Exponential Moving Average (EMA): A type of moving average that gives greater weight to recent prices for trend analysis.
Gamma: The rate of change of delta, indicating how quickly an option’s sensitivity to price movements changes.
Implied Correlation: A measure derived from options prices that estimates how individual stocks are expected to move relative to each other.
Options Expiration: The date on which options contracts expire and are settled.
Relative Strength Index (RSI): A momentum indicator used to assess overbought or oversold conditions.
Disclosure
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.