Elevated Dispersion Highlights Market Vulnerability
It was a relatively quiet day of trading. The early morning strength faded by midday, leaving the S&P 500 up just 26 bps.Tomorrow will be more important, with the JOLTS report in the morning and about $100 billion in Treasury settlements, which could put downward pressure on markets if liquidity needs to be raised.
Dispersion remained the theme, with the Dispersion Index still elevated. While it could rise further, it’s something to watch—high dispersion typically coincides with low correlations.
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At 10.5, the 1-month implied correlation index is very low.
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Individual stock implied volatility has also risen sharply in recent weeks, reflecting the broader market’s elevated dispersion, which remains intact.
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In the meantime, realized volatility has remained relatively unchanged over the past couple of days and remains very low. Taken together, this leaves the market in a fairly vulnerable position.
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I wish there were more to say, but end-of-quarter rebalancing may be influencing moves in rates and FX, and I don’t think that’s worth reviewing at this time. Based on today’s levels for the TGA and reverse repo, I estimate reserves are around $2.9 trillion. While they should rebound somewhat on Wednesday, liquidity is clearly not as ample as it has been, and over time, reserves are likely to keep contracting until the Fed ends QT.
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If overall market breadth is any indication of these lower liquidity levels, then the Summation Index, which is likely to decline again today, is a prime example.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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