Market Analytics and Technical Considerations
Key Points
A lot of economic data will be released this week, starting to pick up steam on Tuesday and then moving into overdrive on Wednesday. The week will be evaluated by Jay Powell on November 30 at 1:30 PM ET.
He cannot possibly be dovish, particularly following the reading of the Fed minutes. He won’t commit himself to anything since, according to those remarks, rates will rise, particularly given that the CPI report is expected a day before the December rate release.
The fact that reserve balances ceased increasing last week and the Treasury has only a few weeks left to bring the Treasury General Account to the $700 billion level it has stated it wants the account at by year’s end is another issue that markets are confronting. This implies that the TGA must increase by about $200 billion, which will deplete reserve amounts of liquidity. Reserves will most likely return to their October lows, which coincided with the S&P 500 lows, if that occurs.
The market’s other issue is that margin financing conditions are once more becoming more restrictive. Similar to how they did in March and August, rising reserve balances and easing financial conditions for margin have provided stocks a significant lift. However, if reserve holdings decline and margin requirements tighten further, a significant amount of market liquidity will be lost from now and year’s close. Since the March 2020 lows, this market has relied on liquidity to power it both upward and downward.
SKEW
Additionally, we are aware that Powell intends to restrict financial conditions generally, which will be a challenge. Understanding all of these things makes it difficult for us to feel optimistic heading into the year’s finish. In addition, traders are once again beginning to consider tail risk. Last week saw a significant increase in the SKEW index.
CBOE SKEW Index Daily Chart . Source: TradingView
VVIX
Since hedging is currently more affordable than at any time in the previous year, there has never been a better opportunity for traders to consider tail risk once more. The VVIX is approaching its low points and is also gradually rising. indicating that the implied volatility of both the VIX is increasing, and that hedging will become more expensive as a result. Thus, when traders look for inexpensive out of the money protection, you will start to see this process taking place with the SKEW Index.
VIX
Additionally, we note that the difference between the 3-month generic VIX futures contracts and the spot VIX index is currently -5.33. In the past, tops in the S&P 500 have coincided with that spread falling below -5, and that is where we are right now.
S&P 500
The S&P 500 is currently still displaying a diamond reversal formation, and the index is based on an unsteady sequence. We I remain optimistic that the index will close its gap around 3750 and possibly return to 3,600 if the TGA increases as anticipated.
