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Stocks finished higher, with the S&P climbing by 0.08% on the day. Today was not boring. It was actually very interesting and exciting in some ways to see how things are coming together, as I noted in today’s video to members. You could see these mild changes happening in the volatility space of the market, most notably in the 1-month Implied Correlation index and the volatility space.

After starting the day lower, the 1-month implied correlation index rose by around 5%. Around 10:15 AM ET, this started to creep higher, even as the S&P 500 was rallying, and climbed higher by as much as 80 bps at one point during the day. Typically, on an up day in the index, this implied correlation index should go in the opposite direction of the equity market.

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Also, the 1-month implied correlation index was already trading on par with the July lows and the lows seen in January 2018 and the fall of 2018. All of which marked important price tops in the market. It hasn’t always marked the peak in the market before a major sell-off, but this seems to be similar to that 2017-2018 time frame. Considering this is the second time it has gotten this low in about seven months compared to the January 2018 and October 2018 versions.

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The second clue was that the IV was rising, which was noted most easily by the VIX, which started to climb higher around 10:30 AM.

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The Bank of Canada’s rate decision aided this. It left rates unchanged and lowered the country’s growth and inflation outlook. That led to a big rally in the US dollar/Canadian dollar pair, which probably helped to push the VIX higher, given their historical relationship.

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The final straw was the 5-year auction, which did not go well and saw indirect participation fall to just 60.9% from 70.6% last month and had a tail of around two bps today, with a weak bid-to-cover ratio. It pushed the 10-year up by more than four bps on the day, 4.18%.

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It all came together to reverse an 80 bps gain in the S&P 500 to just an eight bps gain. We will see what tomorrow brings.

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Tesla (TSLA) reported some ugly results, missing earnings, revenues, and gross margins. To make it worse, it took out the 50% average compounded annual volume growth rate language in its investor deck. I think that is a really big deal, and I know that when I owned the stock, what got me to sell it was that I realized at some point that language needed to come out, and I wanted to be nowhere near this when it did. The stock is only down 2%. Either the stock is waiting to find out more on the call, or the big level of put gamma at $200 is supporting it. There isn’t much gamma there, so once it burns itself out there is not going to be much holding it up.

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(BLOOMBERG)

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