Market Divergence Widens As Liquidity Evaporates
The S&P 500 finished the day down about 1%, while the Equal Weight Index declined roughly 0.43%. This continues to reflect what we’ve been discussing in recent weeks — the growing divide between the tech-heavy segment of the market and everything else, driven, I believe, by insufficient liquidity to support broad participation across all sectors at once.
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Speaking of liquidity, the reserve balance fell again this week, ending at $2.83 trillion as the TGA continues to climb, draining reserves from the system. Tomorrow marks both the month-end and a $58 billion Treasury settlement date, and I would expect overnight funding pressures to be fairly tight, with increased usage of the Standing Repo Facility.
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In the meantime, the VIX actually closed lower on the day. But more importantly, the dispersion index fell and implied correlation rose — exactly what we’d expect now that earnings from the major stocks are out. I would expect this trend to continue tomorrow and into next week. As the spread contracts, the S&P 500 typically declines, and that’s what I anticipate happening going forward.
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Amazon (AMZN) is trading higher after hours, but the problem is that the call wall sits at $250. The $250 calls expiring tomorrow closed today at $0.83, down from $2.17 on Wednesday. With the stock trading around $251 after hours, those calls still aren’t worth much and will likely be dumped, which could cause the stock to give back a good portion of its after-hours gains.
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More By This Author:
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The Market's Moment Of Truth May Have Finally Arrived
Disclosure: Michael Kramer and the clients of Mott Capital own AMZN long-term.
This report contains independent commentary to be used for informational and educational purposes only. ...
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