Image Source: Video Length: 00:12:19Market Analysis: NVIDIA’s Impact and Liquidity IssuesI wanted to start by discussing NVIDIA’s () significant impact on the S&P 500 today. NVIDIA essentially accounted for all of the day’s gains in the S&P 500. We’re looking at a proxy for the S&P 500, which is the Bloomberg 500. This index shows that NVIDIA accounted for 93% of the day’s gains. If NVIDIA were flat on the day, the S&P 500 would also be basically flat. If NVIDIA’s stock went down, the S&P 500 would likely be down as well. This highlights the substantial weighting and influence NVIDIA currently has on the market.Low Trading Volumes and Market HighsWe’re observing very low volumes in the S&P 500 futures market. This isn’t the first time we’ve seen volumes decrease to this lower area and then bottom out. Historically, these periods of low volume have often marked local highs in the market. Once the volume starts ramping up again, we tend to see significant moves downward very quickly. This pattern suggests that low trading volumes can be a precursor to market corrections.Liquidity Concerns and Top of Book DynamicsThis scenario is more of a liquidity issue, which we’ve been discussing extensively. The “top of book”—the highest bid and lowest ask prices in the order book—was down yesterday as of the 23rd. While on the 22nd it reached levels similar to where it’s been over the past few weeks, it’s important to note that the top of book is historically extremely low right now. This thinness in the top of book means that when sellers step back, the market can rally simply because there are no sellers present.Widening Spreads in SPYI reviewed the spread on the SPDR S&P 500 ETF Trust () today. The white bars represent today’s data, and the comparison is against the 180-day historical average. The spreads are noticeably higher than normal. We’ve observed this widening of spreads multiple times with SPY. It wouldn’t be surprising to see the spreads slightly wider again today. Yesterday, spreads were around two cents, and today they traded mostly in the one and a half to two-cent range, which is above the norm. Looking at the 20-day historical average, this is about where we’ve been recently. So, spreads are likely to remain around where they were yesterday or maybe just slightly lower, but for the most part, they’re consistent with recent averages.Implied Correlation Index DeclineAnother interesting observation today is the rapid decline in the one-month implied correlation index, as well as other correlation indices, back to the lower end of their ranges. The one-month implied correlation index, represented by the white line, is approaching 11, which is historically low. We don’t typically see it reach this level often. In the past, bottoms were closer to the 13 area, although more recently, we’ve been hitting the 10 and 11 regions. These are historically low numbers.As we’ve discussed previously, when the implied correlation index bottoms out, it tends to mark a top in the S&P 500. Conversely, when the implied correlation index peaks, it often signals a bottom in the S&P 500. This pattern has repeated itself over time. Currently, we’re watching to see if the implied correlation indices begin moving higher. Interestingly, today the one-year implied correlation index was higher, while the one-month, three-month, and nine-month indices were all lower. It’s unclear whether the one-year correlation is a leading indicator in this context. In my experience, longer-duration indices tend to start moving before the shorter ones, but we can’t draw conclusions based on one data point. This is something that warrants further monitoring.Market Liquidity and Credit SpreadsWe’re in a market with low liquidity, and the implied correlation indices are reaching stretched levels at the lower end of their range. Additionally, we observed that high-yield credit spreads, specifically the high-yield Option-Adjusted Spread (OAS), actually increased today despite the CDX index moving down. The CDX index measures credit spreads on credit default swaps (CDS), and I use it as a real-time indicator for high-yield credit spreads. While it’s not perfect, it provides a good sense of what’s happening with high-yield spreads.The divergence between the high-yield OAS increasing and the CDX high-yield index decreasing is unusual. I’m not certain if this indicates that high-yield spreads will begin to move higher. Given the consumer sentiment numbers we received today, particularly the “jobs harder to get” indicator from the Conference Board, there might be implications for unemployment rates. Historically, when this indicator rises, it tends to correlate with increasing unemployment rates and widening credit spreads.Consumer Confidence and Unemployment IndicatorsThe “jobs harder to get” metric is starting to rise, as shown by the orange line in historical data that goes back to the 1970s. This rise typically signals that consumers perceive the job market as tightening, which often precedes increases in unemployment rates. Despite this, we haven’t seen a significant rise in credit spreads yet. It could be that credit spreads will be slow to move until we see this data reflected in the initial jobless claims numbers. Credit markets may be waiting for real-time validation that employment is indeed slowing down.Currency Movements: Canadian Dollar vs. US DollarToday, the Canadian dollar strengthened materially against the US dollar. We’ve discussed this relationship extensively in the past. Typically, when the Canadian dollar weakens, we tend to see the S&P 500 decline, and vice versa. Currently, the Canadian dollar has strengthened significantly since August 5th, moving down to 1.345 and marking a local top and bottom in the S&P 500.What’s interesting is that despite this substantial move down in the USD/CAD pair, the S&P 500 has only managed a modest gain. This lack of significant movement in the S&P 500 suggests that the currency move isn’t providing strong confirmation of market direction. Notably, the USD/CAD is now trading below its lower Bollinger Band, with the Relative Strength Index (RSI) around 31, indicating it’s close to being oversold. This could signal a period of consolidation or a potential reversal back to the 20-day moving average. If we start to see a move up in the USD/CAD, it could indicate a short-term or local top in the S&P 500. This is another factor we need to continue monitoring.Reserve Balances and Market ImpactWe’ve also been closely watching reserve balances, which continue to decline. Based on my model, I’m projecting that reserves are currently around $3.16 trillion, down from approximately $3.4 trillion on September 11th. That’s a significant decline, and we haven’t seen the S&P 500 react correspondingly yet.Historically, there’s a strong relationship between reserve balances and market movements, although it’s much harder to predict in real-time due to lags and the lack of a perfect correlation. Looking back, we can see that peaks and troughs in reserve balances often align with tops and bottoms in the S&P 500. For instance, peaks in reserves have corresponded with market tops, and increases in reserves have often preceded market rallies.Currently, we have several forces at play: an oversold Canadian dollar, implied correlation indices at the low end of their range, declining reserve balances, widening spreads both in high-yield credit and in bid-ask spreads, and overall liquidity concerns. Despite these factors, we haven’t seen definitive confirmation in market movements yet.Technical Analysis and Potential ScenariosFrom a technical analysis standpoint, the S&P 500 has potentially form an ABCDE pattern. If we gap higher tomorrow and break out, we might see further upward movement. The JPMorgan collar strategy is also in play at 5750, but I won’t delve into that now.Alternatively, if we break lower, there’s a substantial gap to fill down to 5600, and we have all the post-CPI (Consumer Price Index) activity to consider. Given the various indicators and market dynamics, it’s crucial to stay vigilant and monitor these factors closely as they develop.More By This Author:The Stock Market Has Stalled As Earnings Estimates FallBig Problems May Lie Ahead For The Stock MarketThe Overnight Stock Market Futures Party Magically Fizzled Midday
Stocks Stall As Liquidity Continues To Be A Big Problem
