Stocks fell on Wednesday, but the S&P 500 declined by only 50 basis points. However, the S&P 500 equal-weight ETF RSP rose by nearly 90 bps, which is notable dispersion today. This was noted in the Dispersion index, which rose to 37.6, and is again reaching the upper end of its historical range. With earnings season winding down, I expect market dispersion to fade and correlations to rise more steadily.

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The dispersion index, minus the 3-month implied correlation index spread, has risen today. Again, this spread should be positioned to contract over the next couple of weeks as earnings season winds down and these dispersion trades unwind.

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One reason we may be seeing so much strength in Walmart and the “staples” is that implied volatility has been rising, as it normally would heading into earnings season, but this year, IV appears to be heading much higher than in previous quarters. Walmart WMT doesn’t report results until February 19, and most retailers report earnings later in the season, so it is quite possible that the reason we have seen so much strength in the XLP isn’t that or a rotation, but rather the same dispersion trade we saw pre-tech earnings.

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Rates rose today by around 2 bps on the 30-year to 4.92, so here we go again. Testing the upper end of resistance, will it break out? Who knows. Rates have every reason to rise for weeks, yet they don’t; they are frozen in time. The 30-year could easily be over 5% at this point, yet we still wait.The QRA today continues to hint at increasing issues on the long end, but it has not yet occurred.

The QRA noted that the TGA is expected to exceed $1 trillion around tax season, representing a $150 billion increase from current levels. That’s a lot of liquidity coming out of the market, and the Fed’s T-bills will just dilute that, not offset it, based on my rough math. Then, Warsh will come in May, and then I have no idea what will happen with the balance sheet. Liquidity is likely to remain tight for some time longer.

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