The S&P 500 finished higher by around 45 bps, while the equal-weight RSP ended lower on the day by nearly 40 bps. It wasn’t exactly a great day for most of the market, though you wouldn’t know that by looking at the headline readings.
It feels like things are going from bad to worse on a daily basis in the S&P 500, with the index getting increasingly stretched. I’ve been asked a few times over the weekend and again today when it might turn, and my answer has been the same each time—I think we’re there. A significant amount of liquidity has been drained from reserve balances, and we’ve seen that pressure show up in the overnight repo markets as well.
With OPEX behind us, there’s no pinning effect supporting the market at this point. Meanwhile, realized volatility remains at very low levels, even as dispersion is running quite high.
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The volatility of S&P 500 constituents was higher today, which seemed odd, though the VIX was also higher—also unusual given that the S&P 500 finished up on the day.
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9-day realized volatility ticked higher on the day, rising from a minuscule 4.89 to 4.95.
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Meanwhile, 3-month realized volatility fell to 8.65.
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There isn’t a single indicator that can tell us the market is topping, but when you combine several together—and consider how overvalued the index and many of its stocks are, along with the liquidity that has already been drained—you realize there doesn’t need to be a specific reason for a turn, and just that the music stopped.
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