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Whether the S&P 500 can extend last week’s rally is the big question now, and it would seem the path forward may be challenging. Now that volatility metrics have fallen back towards their recent lows, the VIX 1-Day — which, when inverted, often tracks the S&P 500 more closely than the VIX itself — now sits around 11, placing it near the lower end of its historical range. It is possible it opens closer to 8 on Monday, but at this stage, there is not much room for it to fall further.

Given that limited downside, the volatility tailwind that has supported the market through the holiday week is unlikely to be as strong in the days ahead. With a substantial amount of economic data on the calendar, it is quite possible that the VIX 1-Day begins to move higher again as event risks return.
 

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Additionally, we saw very poor trading conditions over the past week, with the top of the book on the S&P 500 E-minis thinning out and the spread between the bid and the ask widening considerably. This likely played a major role in the week’s trading action as well. It is therefore quite possible that, as conditions normalize this week, those pockets of thin liquidity will begin to fill in and the bid–ask spreads will narrow somewhat.
 

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These poor trading conditions in the S&P E-minis also pushed trading costs higher, making execution extremely expensive and well above levels seen over the past month. This again likely played a significant role in what we have been seeing in the market. When you combine that with volatility levels being reset, it suggests there simply wasn’t enough liquidity across the market to maintain a level, balanced trading environment.
 

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On top of that, Monday brings an $84 billion Treasury settlement, following the $52 billion settlement on Friday, Nov. 28. This has already pushed overnight funding rates sharply higher. The average repo rate on Friday was 4.09%, suggesting the SOFR rate on Monday morning will likely creep higher from its 4.05% level and result in even firmer overnight funding conditions.
 

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However, these pressures should begin to ease as we move through the week and the month-end effects fade. The Treasury also has two paydowns scheduled, which will add some liquidity back into the system — roughly $11 billion on Dec. 2 and about $7 billion on Dec. 4. So I would think that SOFR falls back towards the middle of the Fed’s targeted range by mid-week, and usage of the standing repo facility fades.
 

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Additionally, last week we saw BTIC adjusted S&P 500 Total Return futures (EFFR) for December 2026 decline to 76.5 after peaking around 86.5 in mid-September. If this divergence with the S&P 500 cash index continues, it will be worth noting, as we have seen this bearish divergence before.
 

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Additionally, the BTIC-adjusted S&P 500 Total Return for SOFR fell to 73 from around 85 at the same time.
 

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Typically, when the cost of equity financing declines, repo demand eventually drops, and equity prices follow suit.
 

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Also, equity repo is tied to daily Treasury volumes, and when Treasury repo activity rises, equity repo volumes fall, and vice versa. Below is a chart that shows the 10-day moving average of Treasury repo volume at DTCC.
 

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More importantly, Treasury repo activity increased towards the end of last week, and we will need to watch to see if it continues to rise.
 

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Anyway, there's lots to digest this week, and it will be exciting to find out if the pieces are falling into place -- that’s for sure.

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