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Stocks fell for a second day, with the S&P 500 dropping by around 80 bps. The index gapped lower, unwinding the big buy imbalance at yesterday’s close. It did find support on a few occasions at 4,700, serving as the put wall today. This lower move likely sent the index into negative gamma, with the zero gamma level at 4,740. Unless the zero gamma level starts to move lower or the S&P 500 moves higher, we are likely to see negative gamma lead to expanding levels of volatility, which could mean that equities are pressured lower.

Once 4,700 breaks, the index can accelerate as negative gamma expands volatility, and the next significant level of gamma is not until 4650 or 4600. The nature of the rally was on what looked to be unstable ground, and there was a sizeable gap around 4550. So if things start breaking down below 4,700, then the pace of the sell-off has plenty of room to run until a stabilization area is found.

Today also saw small-cap stocks get hit fairly hard, with the Russell 2000 IWM ETF falling by almost 2.7% on the day. The ETF managed to close below all of the prior tops after just breaking above all of those tops in mid-December. When an asset moves above its prior highs and fails to find support at those prior highs, it is generally not a sign of good things to come. Unless the IWM can quickly turn higher and move back above the $199 level, the outlook doesn’t look good. The big support level for the IWM is the gap around $193; below that, a drop back to $180 becomes possible.

The 10-year tried to move beyond the downtrend today but failed, giving back some of the moves higher in rates, following the Fed minutes.

For the most part, the Fed minutes didn’t reveal much we didn’t know, which is that the Fed probably isn’t cutting rates as aggressively as the “market” priced in. The other interesting point about the Fed minutes was the conversation around starting to prepare for the eventual end of QT. The Fed will likely end QT before the Reverse Repo Facility drains completely. The point is that the Treasury will issue a lot of debt over the first quarter, and the repo facility may drain much faster than most people expect. There is no clear sign of ample reserves, as it would be the level of reserves needed to fund the overnight market without causing the General Collateral (SOFR) rate to spike. I have seen estimates that reserves need to stay around $3 trillion for reserve balances to remain ample, which makes sense to me, as I have heard Fed officials speak of estimates that are around 10% of nominal GDP, which would be around $2.8 trillion. So, with reserves currently around $3.45 trillion, the days of excess reserve are coming to an end, and that is likely to create a deleveraging event. Because the market cap of the S&P 500 is extremely stretched when compared to current reserve balances. But I’m not going to get into that today.

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