S&P 500 Equal Weight Double Tops as Main Indexes Hold Breakout: Divergence Ahead?
Michael Kramer | Feb 06, 2024 15:59
Stocks finished lower today, following a hotter-than-expected ISM services index. The jump in the prices paid index was the largest since 2012, surpassing all of the data from 2021 when inflation was moving higher.
This is a meaningful jump, and the report notes that 15 industries reported higher prices in January and only one experienced a decrease.
This gave rates a second leg higher on the day after Jay Powell confirmed on 60 Minutes of a low likelihood of a rate cut in March and it was more likely to come later in the year. It left the 10-year 14 bps higher on the day.
This resulted in the US dollar strengthening today, with the most interesting sign of strength from the dollar being against the euro as it has now completely broken free from what appears to be a giant diamond reversal top and the potential to return to 1.05 to the dollar, or worse back below parity.
Overall, if we see rates rise and the dollar strengthens, it should lead to a tightening of financial conditions, which translates to a higher VIX and lower stock prices.
The S&P 500 Equal Weight Index was down by 86 bps today, while the S&P 500 market cap-weighted index was down just 32 bps.
The RSP ETF (NYSE:RSP) seems to tell a different tale than the SPX. The RSP clearly shows that ETF failed to get beyond $158.50 and shows the potential double top pattern in place.
But for confirmation, we need to see the RSP drop below $153. If that were to happen, it would likely to lead a much larger decline, especially given the size of some of the gaps back down around the October lows.
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It probably would have been worse for the S&P 500 today if not for the fact that NVIDIA (NASDAQ:NVDA) was up again, rising 4.8% and closing completely outside of its upper Bollinger band with an RSI of 85.
These two conditions, when combined, suggest the stock is currently overbought.
At least based on the implied volatility profile of today’s price action, with the 105% moneyness 1-month options IV pushing above that of the 95% moneyness puts, it would suggest that the stock is amid a giant gamma squeeze higher.
The term structure of IV for the March OPEX probably tells you all you need to know about what is happening in the stock. There are lots of demand for calls, coupled with an extremely overbought stock price.
It is like a star that has gone supernova; at some point, the IV will get so high the stock will implode on itself.
Anyway, that’s all for today.
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