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Stocks stalled on December 2nd, with the S&P 500 ending the day essentially unchanged, rising just 25 basis points. The index appears to be stuck between 6,850 and 6,800, and at this point, we’re simply waiting for a clear sense of direction.

Looking at the futures, the pattern is a bit clearer. Unfortunately, it has been an unreliable setup lately because it has played out in both bullish and bearish scenarios. What we’re seeing now is another one of these diamond-type patterns forming in the S&P 500 futures, with something similar also appearing in the cash market. We’ve had big rallies and several unfilled gaps recently—even in the futures—which is unusual and suggests the market may begin to fill some of those gaps.
 

Liquidity conditions have tightened enough to make that plausible, and we’ve also seen a fair amount of volatility across other liquidity gauges. So it wouldn’t be surprising if we broke support at the 6,800 level in both the futures and the cash market and began to fill some of the lower gaps, such as around 6,780 and potentially down toward 6,725 on the futures. That’s where things stand at the moment when I look across the futures, the cash market, and the broader S&P 500.
 

With the VIX 1-Day closing around 10.5, I just don’t think there’s enough volatility left to be sold in the marketplace to allow the index to break out and move higher. In fact, heading into a week filled with economic data and with a Fed meeting coming next week, it seems more likely than not that implied volatility will begin to rise. And as it does, that should result in stock prices moving lower.
 

Additionally, VIX options appear to be positioned in a way that keeps the index sticky around 16. Below that level, delta values flatten out, which means the hedging dynamics that normally push the VIX around are no longer present. As a result, those mechanical forces are likely to fade, keeping volatility pinned and putting a lid on the S&P 500.
 

(https://optioncharts.io/options/$VIX)

Today was a settlement day, and, more importantly, it was a net paydown of about $11 billion, which, in theory, should add liquidity back into the system. This helped general collateral rates fall to 4.03%, which should mean that SOFR drops tomorrow morning sharply from the 4.12% reported today. With another net paydown of $7 billion coming on Thursday, overnight funding pressures should continue to ease — the only question is by how much.
 

Additionally, we saw Treasury volumes rise today at DTCC, and one working theory I am still sorting through is that when Treasury repo volume increases, the availability of equity repo tends to fall. When equity repo availability falls, stocks usually weaken. Therefore, if this relationship is correct, rising Treasury activity should coincide with lower stock prices.

I could certainly be missing something, but I’ve been monitoring this relationship for a couple of months now, and I feel like I’m finally at the point where I can start mentioning it more regularly.
 

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