MARKET WRAP

Equities paused today following yesterday’s sharp rally. The SPX ended -0.2%, while the QQQs finished with a more notable -0.9% pullback. IWM eeked out a small gain of +0.2% as treasury yields continued to ease ever so slightly, with the 10-year yield now 4.62%. TLT rose for the third consecutive day, now trading above $87, a notable recovery from Monday’s low of $85. Oil saw a slight pullback but remains a key focus, having gained about $10 over the past month. On the earnings front, TSM rose by +4% after reporting results, though it stayed within its expected 6% move. That wasn’t enough to sustain momentum in stocks like NVDA, which closed -2%, giving up a big portion of yesterday’s gains. NVDA is now flat for the year and about $20 below its early January intraday highs. For more on tomorrow’s options expiry and its potential impact on near-term trading conditions, see the bottom of this email.

MRKT MATRIX: January 16, 2025

Today’s Top Stories:

• S&P 500 is little changed, Apple shares lead Nasdaq lower (CNBC)

• Morgan Stanley Profit Doubles With Big Stock-Trading Beat (Bloomberg)

• Bank of America tops estimates on better-than-expected investment banking, interest income (CNBC)

• LA Fires Test Bond Market Used to Shaking Off Disasters (Bloomberg)

• Mortgage Rates Top 7% for First Time Since Mid-2024 (WSJ)

• Wall Street Thinks U.S. Homes Are Overpriced (WSJ)

• EV, hybrid sales reached a record 20% of U.S. vehicle sales in 2024 (CNBC)

• Israel Delays Cabinet Vote on Cease-Fire Deal, Blames Hamas for Reneging (WSJ)

• TikTok CEO Plans to Attend Trump’s Inauguration (WSJ)

Today’s MRKT Call is Presented by SoFi

Stocks Digest Latest Inflation Data

Timecodes

• 0:00 - Macro Outlook

• 13:30 - Liz Looks At Inflation

• 29:30 - NVDA & INTC

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What’s Next?

Expiration Friday. Over the past few months, we’ve seen several significant options expirations, and tomorrow's is noteworthy for a few unique reasons. The December monthly expiration was the largest ever by notional value, with much of the positioning established before the election. This created a supply of options between the 6000-6100 SPX range, which stalled the post-election rally and limited market movement until those options were rolled or expired during the week of December 20th. With that came a month of volatility, with swings in both directions becoming the norm, but with a fairly obvious cap near the prior highs. Interestingly, despite these fluctuations, the SPX has returned to nearly the same level as it was during December expiration (around 5930).

Tomorrow’s expiration is smaller in scale but still has critical elements to monitor:

1. Option Supply Around SPX 6000: Significant option positioning near the SPX 6000 level could limit market movement into tomorrow’s close unless we see a sharp downside move at the open. The most likely scenario is a finish near today’s closing level. If the SPX opens in the 5950-6000 range, tomorrow could be a low-volatility day. A breakout above 6000 is unlikely tomorrow due to the pressure from expiring options, but after Monday, once these options are rolled or expired, equities may have a clearer path to retake recent highs on any positive news.

2. Downside Risks Remain after Expiry but Slightly Lessened: If the market sells off next week, there’s limited support from options below, as the recent sell-off began exposing an "air pocket" below. This explains why the VIX climbed above 20 recently. The same conditions to the downside from earlier this week are pretty much remains after expiry, but to a slightly lesser effect with the time to expiry now mostly weeks away.

Another notable factor is the high volume of single-stock options expiring in January, driven by the presence of long-term options (LEAPS). Many of these positions were established over a year ago, and their expiration or rolling could create single-stock volatility beginning next week, of particular note because it’s during earnings season.

Key Takeaway:
After tomorrow’s expiration, the market could see downside risks if spooked by treasury yields or earnings results, similar to what we saw earlier this week. However, starting Monday, much of the upside overhead supply from options will be gone as well, a new market condition that potentially paves the way for new highs if bullish sentiment strengthens.


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