The S&P 500 ended the day up about 40 basis points yesterday, showing little reaction to the rising VIX, increased 1-month implied correlation indexes, a steeper yield curve, and a weakening US dollar. This muted response highlights the influence of CTA flows, which have been steering the market recently.
The 1-month implied correlation index, the VIX, the VVIX, and the S&P 500 will not often rise on the same day. Yet, that’s precisely what has been happening over the past few days. The implied volatility metrics typically trade opposite to the cash market.
The BLS reported yesterday that 818,000 fewer jobs were created through March 2024 over the past year than originally estimated. This news initially pushed yields lower to start the day.
Then, the Fed minutes were released at 2 PM ET, revealing that it may be appropriate to cut rates in September.
Unsurprisingly, this led to some steepening of the yield curve, but the steepening process is just beginning, and there’s likely much further to go.
Jobless Claims to Get Another Market Reaction?
Today is initial jobless claims day, which could either help or hinder the steepening process. The last two weeks have seen some strong reactions to the data. Predicting the outcome is impossible, but the trend for continuing claims has generally increased. Who knows, it might even be forming a cup and handle pattern.
Could this be why the implied correlation index, the VIX, and the VVIX were up yesterday? Possibly, but with the VIX 1-day around 11.6, it doesn’t seem like a strong enough reason; the VIX 1Day is too low.
USD/CAD Looks for a Bottom - What It Means for S&P 500
Meanwhile, the USD/CAD is still searching for a bottom around the support level at 1.36. It appeared to find some stability around midday, but the pair surged sharply higher following the release of the Fed minutes.
It even formed a nice-looking double bottom at the lows yesterday before returning to the support/resistance level. We know that the USD/CAD has been one of the currencies that can help us identify tops and bottoms in the S&P 500.
If the bottom was indeed set yesterday, it could indicate that a top has been put in place for the S&P 500, we only know with hindsight.
Nvidia Stuck at $130
Finally, the suspense builds for Nvidia (NASDAQ:NVDA), with earnings coming next week. We can already see that the big gamma level for expiration during the week of August 30 is at $130, the same as this week’s expiration. So, for now, that remains a key resistance level.
Additionally, implied volatility (IV) for next week is already over 80%, and chances are it will climb even higher as earnings approach. This means call options will likely be inflated by IV heading into the event, suggesting that market makers might be over-hedged against the stock moving higher after the results.