The S&P 500 recovered from a steep morning decline to finish down just 16 basis points. The key takeaway, however, is that the index once again touched the 20-day moving average and failed to close above it. It also reached the 10-day exponential moving average and closed below it.
It’s worth noting that the S&P 500 hasn’t traded below both the 20-day and 10-day moving averages for three consecutive days in quite some time. This could suggest that a potential change in trend is developing—something that warrants close attention.
Additionally, the index reached the 61.8% retracement level today but failed to move beyond it. With OPEX this week and the put wall firmly established at 6,500, it wouldn’t be surprising to see that level tested before the end of the week.
We also saw implied correlations rise while dispersion declined, narrowing the spread between the three-month implied correlation and dispersion indices. Historically, when that spread begins to narrow, the S&P 500 tends to follow lower. We’ll need to monitor how this relationship evolves in the coming days.
One development that may have gone somewhat unnoticed today—given the market’s focus on rate cuts and trade headlines—is that Chair Powell signaled the end of quantitative tightening could be approaching. That’s a meaningful shift, as we’ve recently seen rising overnight repo stress while SOFR swap spreads have remained deeply depressed. Today, however, those SOFR swap spreads began to turn less negative. This will be an important trend to watch as the market starts to anticipate the eventual end of QT.
While there isn’t a perfect relationship between SOFR swap spreads and high-yield credit spreads, there is a mild correlation. This suggests that if SOFR swap spreads begin to rise, we could also see high-yield and other credit spreads widen as well.
-Mike
Glossary by ChatGPT
Basis Points (bps): One hundredth of a percentage point, used to measure changes in interest rates or financial percentages.
Credit Spreads: The difference in yield between corporate bonds and comparable government securities, reflecting credit risk.
Dispersion: A measure of how differently individual stock returns move relative to each other within an index.
Exponential Moving Average (EMA): A type of moving average that gives more weight to recent price data.
Implied Correlation: A measure of how much assets within an index are expected to move together based on options pricing.
OPEX (Options Expiration): The date when options contracts expire, often causing increased market volatility.
Put Wall: A concentration of put option open interest at a specific strike price that can act as a support level.
Quantitative Tightening (QT): The process by which a central bank reduces its balance sheet by selling or letting assets mature.
Repo Market (Repurchase Agreements): A short-term lending market where securities are sold and repurchased to manage liquidity.
SOFR (Secured Overnight Financing Rate): A benchmark interest rate for overnight loans collateralized by U.S. Treasury securities.
Swap Spreads: The difference between the yield of a swap contract and a Treasury bond of the same maturity, indicating market perceptions of credit and liquidity risk.
61.8% Retracement Level: A key Fibonacci retracement level used by technical analysts to identify potential support or resistance areas.
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