Last week may have been a build-up to Halloween because some of those earnings reports were horror shows. I’m not sure how much better this week will be from that standpoint. Some stocks were absolutely destroyed during the week, and it seems like 10% to 20% moves are par for the course. It was a brutal week, and of course the S&P 500 made it seem a lot better than it was.
The Nasdaq 100 fell more than 6% in October, and the SMH fell more than 14%. Meanwhile, the S&P 500 moved less than 1%. The equal-weight S&P 500 was UP almost 5%.
Liquidity will remain a headwind this week, though not as bad as last week. Treasury will have a $17.4 billion coupon paydown on November 2, adding liquidity to the market. Then on Tuesday, November 3, net T-bill issuance is $45.4 billion, and net issuance is only $8 billion on November 5. That is a bit deceptive, because the Treasury is paying down $25 billion in a cash management bill. In all, T-bills draining liquidity from the market has continued to be an issue, and the longer we track it, the harder it becomes to deny the impact. I can’t make the relationship more visual than the chart below.
The relationship with Bitcoin is probably the most striking. Unfortunately, this means the rest of November is not going to go very well.
However, if I remember correctly, last year around Thanksgiving the market rallied because of the short trading days and the volatility crushes that helped offset issuance weakness. This year we will be better prepared for that type of scenario should the opportunity present itself. The VIX actually tends to rise during periods of heavy T-bill issuance, which makes sense, given that stock prices tend to move lower.
There is plenty of reason for volatility to rise this week even without T-bill issuance, with a ton of economic data, including the ISM PMI reports. The ISM manufacturing prices paid index on Monday is expected to come in at 77.1, down from 77.9, while services on Wednesday is expected to show 74.5, up from 74.0 last month. Then there are the midterm elections on Tuesday and the jobs report on Friday, with 62,000 jobs expected to have been created in October.
Meanwhile, the VIX, despite Friday’s spike, is about where it should be based on single-stock volatility and implied correlations. In fact, it is just a bit lower than its 20-day moving average. So don’t expect that to be any help. If volatility is crushed to start the week, it needs to come from the front of the volatility curve.
Yep, the liquidity drain continues, and volatility has plenty of reason to remain high. Monday is the best chance for the market to rally this week. After that, it may only grow harder.
Anyway.
-Mike
Glossary by ChatGPT
Cash Management Bill (CMB): A short-term Treasury security issued outside the regular auction schedule to manage temporary government cash needs.
Coupon Paydown: A net reduction in outstanding coupon-bearing Treasury debt when principal repayments exceed new issuance, potentially returning liquidity to investors.
Equal-Weighted S&P 500: A version of the S&P 500 Index that assigns equal weight to each constituent rather than weighting companies by market capitalization.
Front-End Volatility Curve: The short-maturity portion of the implied volatility term structure, reflecting expectations for near-term market fluctuations.
Implied Correlation: The average expected correlation among index constituents inferred from index-level and individual-stock options prices.
Implied Volatility: The market’s expectation of future price fluctuations derived from options prices.
ISM Manufacturing PMI: A monthly survey-based indicator measuring US manufacturing activity, including production, employment, new orders, and supplier deliveries.
ISM Prices Paid Index: A component of the ISM surveys measuring changes in prices businesses pay for inputs, often monitored for signs of inflationary pressure.
Liquidity Drain: A reduction in cash or available funding within financial markets that can affect asset prices and financing conditions.
Net Treasury Bill Issuance: The amount of newly issued Treasury bills minus maturing bills, representing the net change in outstanding short-term Treasury debt.
Settlement Date: The date on which a securities transaction is completed and payment and ownership are exchanged.
VIX: The Cboe Volatility Index, which measures the options market’s expectation of S&P 500 volatility over the next 30 days.
Volatility Crush: A rapid decline in implied volatility, often following a major event or the resolution of uncertainty, which can influence options-related hedging flows.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
