S&P 500 Shows Weak Momentum; Liquidity Pressures Loom Ahead

URGENT UPDATE: The S&P 500 has just edged up by 20 basis points, indicating a troubling trend of weakening momentum. As trading continues, analysts are raising red flags about upcoming liquidity pressures that could further destabilize the index.

Today, the market experienced a notable rotation away from mega-cap tech stocks, with investors shifting focus to more equal-weighted segments. This rotation resulted in the equal-weighted S&P 500 outperforming its market-cap-weighted counterpart. However, the overall price action suggests that options positioning and volatility dynamics are driving market movements more than genuine investor sentiment.

The trading behavior over recent weeks highlights a concerning pattern: several Mondays have seen strong rallies, only to be followed by subdued activity on Tuesdays and Wednesdays. This trend suggests that liquidity might tighten again as a series of Treasury settlements approach, beginning on Wednesday, November 12, 2023, due to the upcoming Veterans Day holiday on November 11, 2023. Subsequent settlements are scheduled for November 13, November 17, and November 18.

These settlements are expected to drain liquidity from the market and could lead to increased overnight funding and repo rates. Market analysts emphasize that if the Standing Repo Facility experiences heightened usage on these settlement days, it could indicate emerging funding pressures. Such conditions may influence overall risk sentiment and market tone as we move through the week.

Despite the S&P 500’s modest gain, the underlying metrics paint a grim picture. The S&P 500 Dispersion Index has declined while the 3-Month Implied Correlation Index has risen. This combination typically signals that the index should be moving lower, not higher. Furthermore, the contraction of the spread between dispersion and correlation is historically associated with market weakness.

In light of these dynamics, many experts caution that Tuesday’s gain may be an outlier, driven more by light trading volumes than by improving fundamentals or risk appetite.

Adding to the market’s uncertainty is the ongoing analysis of the 1966 model, which suggests that the S&P 500 may be nearing a turning point. This model, used as a reference during previous market cycles, indicates that a significant downturn could begin within the next few days. While analogs can be imperfect, the model has held up well over the past three years, making it a key point of reference for investors.

In a related development, significant trading activity is anticipated for SoftBank (9984 JP), which has recently sold its stake in NVIDIA (NASDAQ: NVDA). This move raises questions about the motivations behind SoftBank’s trading strategies and the potential impact on global sentiment regarding artificial intelligence (AI). The rising implied volatility in SoftBank suggests increased speculative interest, potentially linked to its previous exposure to NVIDIA.

Investors are now left wondering whether the removal of SoftBank’s NVIDIA stake will deflate some of the speculative excess that has built up in Japan’s AI-related stocks. The next few trading sessions will be crucial in determining whether this development marks the beginning of a broader sentiment shift.

As the market navigates these complexities, investors are urged to stay vigilant and monitor the evolving landscape closely. With critical settlements on the horizon, the S&P 500’s trajectory could change dramatically in the coming days.