It was an odd Monday in the stock market, with the up, the equal-weight ETF down, the up, the up, one-month implied correlations up, and the S&P 500 Dispersion Index also higher. It’s a confusing mix because you don’t normally see the VIX and the S&P 500 rise on the same day, and it’s unusual to see both the Dispersion Index and the Implied Correlation Index up at the same time.
This tells us that implied volatility in the index is rising, and stock implied volatility is rising as well—but stock implied volatility is climbing faster than index-level implied volatility. This is likely because we’re heading into a meeting on Wednesday, and risk is being repriced. Still, it doesn’t change the fact that we saw some major divergences on Monday.
I’d be surprised if this pattern repeated today. If volatility rises again, stocks should fall—or vice versa.
Meanwhile, nine-day realized volatility is also quite low and is sitting in a zone where it doesn’t have much further to fall. Historically, the 4.5% to 5% range has marked the bottom, which probably means realized volatility is due to expand again sometime soon.
In the meantime, the S&P 500 has traded above its upper Bollinger Band for three consecutive days and has an RSI just under 70. That’s a fairly overbought condition.
Liquidity conditions continued tightening on Monday with corporate tax payments and Treasury coupon settlements. Today, conditions should ease somewhat on Treasury paydowns, but this may have only been a dry run for what’s coming at quarter-end. On Monday, the average repo rate traded as high as 4.49%, which means SOFR is likely to rise again today.
That resulted in approximately $1.5 billion in trading in the Standing Repo Facility on Monday. It’s not a large amount, but it’s the first time we’ve seen a flow of that size through the facility since June 30. The upward move in overnight rates and renewed SRF usage suggest the TGA refill is having an impact on liquidity. The pressure the overnight market faces around quarter-end could prove even greater than what we just witnessed.
One would think all of this would have some effect on the liquidity available for leverage, margin, and equity repo financing. In an environment where stocks are overbought and realized volatility is very low, that could be a dangerous combination.
While it’s extremely satisfying to see the moving parts of the market unfold as expected, it would be even more satisfying to see them all come together.