The S&P 500 finished the day higher by about 60 bps, while the S&P 500 Equal Weighted finished the day higher by just 17 bps. It again shows how the indexes are diverging and returning to their ways of mid-summer and December.
The movement in this week’s markets has led me to conclude that we are seeing the dispersion trade we saw over the summer, with sellers of implied on the S&P 500, hedging risk with underlying baskets of stocks in the index.
We can see that the IV of an at-the-money 1-month option for all 7 stocks that make up the mag 7 has stayed flat while the IV of the S&P 500 has moved lower.
Meta (NASDAQ:META) and Nvidia (NASDAQ:NVDA) have both seen their IVs actually rise.
This has sent the 1-month correlation index to fall to just 12 and is at the very low end of the range at this point, and levels that typically come with market tops.
While this index doesn’t tell us when the reversal in the market will come, it gives us a sense of where we are in the process. Again, we used this same index in July to identify the turning point as well.
Additionally, we have seen the CBOE Vix Volatility fall to around 77 yesterday, and at levels typically seen at the low end of the range going back several years. It means that buying puts is really cheap.
So, we have implied volatility at the index levels falling, while the IV for the top seven names is not falling. Great!
Yesterday, we saw the 1-week 50 delta option for the S&P 500 go higher. It’s not by much, but it’s higher, probably because next week is VIX opex, and today is CPI.
Once implied volatility rises on the index level, the entire trade will fall apart just like it did in July.
As a result, we also saw the S&P 500 rally to around 4,790, filling the gap from last week’s decline, and has now hit up against that resistance level that goes back to January 2022, as noted by the purple dotted line.
The question is whether the index can power higher through that resistance level. Based on the chart alone, one could argue that the index tried to make a new high yesterday but failed and was rejected at resistance.
The Nasdaq 100 also rallied yesterday and managed to fill the gap from earlier this year, and it also stopped right at that resistance level. So, this would be the perfect spot if the rally wants to end at these levels.
The other issue is that the 10-year rate is trying to break free of a consolidation phase in a symmetrical triangle and potentially points to going higher.
Given the relationship between stocks and bonds, if rates move higher from current levels, the highs seen yesterday in the S&P 500 will likely hold.
We are seeing the 10-year minus the 2-year also showing signs of potentially moving higher and sitting right at resistance.
It is clear that there is an uptrend present in the spread, and it is clear there is firm resistance around -32 bps, which could end up sending the spread to around -15 bps.
Anyway, today is CPI, so it is anyone’s guess what will happen.