Implied Volatility May Rise, Credit Spread May Widen Amid High Stakes Data
Stocks experienced a peculiar trading day on Friday, with a large market-on-close imbalance causing significant late-day moves. The imbalance, totaling around $7 billion in buy orders, propelled the market higher in the final minutes of trading.
While these imbalances do not provide predictive value for the next day’s market movement, they could be linked to month-end rebalancing. Intraday moves may have also been influenced by traders using 0DTE options, leading to forced buybacks and a squeeze.
Looking ahead, the market may continue to rise, but a pullback is also possible, especially with a flurry of economic data scheduled for the upcoming week. The Federal Reserve will be in a blackout period, leaving economic data as the primary driver of market movement.
It is becoming evident that the market is engaged in a significant trade, potentially on the brink of a reversal. Factors such as credit spreads, correlations, and skew are showing signs of a shift. Implied volatility levels are likely to increase in the short term, especially with key events like the job report and the June FOMC meeting on the horizon.
Additionally, the Bank of Canada is expected to cut rates, potentially impacting the USD/CAD exchange rate. A move above 1.385 in the USD/CAD could signal a risk-off sentiment in the market.
The S&P 500, despite recent hype, has been range-bound since mid-March and is currently within a Rising Broadening Wedge pattern. Friday’s rally, driven by market-on-close imbalances, may not hold, and a retracement could be expected in the coming days.
In conclusion, investors should be prepared for increased volatility and potentially widening credit spreads in the near future. The interplay between economic data, central bank actions, and market sentiment will be crucial in determining market direction.
Source: Implied Volatility May Rise, Credit Spread May Widen Amid High Stakes Data