Stocks Advance Despite Rising Oil And Higher Rates

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.