MARKET WRAP

The good news is that stocks did not follow through to the downside following yesterday’s selling; they remain within a range and near all-time highs. The bad news is we didn’t bounce much and remain towards the bottom of that recent range. Treasury yields took a bit of a breather today. It's hard to envision the next leg higher for the market without the end of rising yields, something discussed at length in the MRKT Call video below. SPX closed today at 5918, up 0.2% on the day. QQQ’s finished slightly in the red. IWM was the worst of the action, down a half percent. We continue to keep an eye on TLT, which closed very slightly in the green, up 0.1%. The VIX took a very slight breather as well, now at 17.69. The VIX has been gradually rising since the holiday trading period but is unlikely to spike significantly above the low 20s unless SPY breaks below the $580 level (discussed further in the What’s Next? section towards the end of this email). The FOMC Minutes were the other macro story of the day and provided a little bit of stability to the market and treasuries intra-day. Equity markets are closed tomorrow for the funeral of Jimmy Carter, trading begins again into the NFP Jobs number Friday morning. SPX/SPY options are pricing about a 1% move for Friday.

MRKT MATRIX: January 8, 2025

Today’s Top Stories:

• Stocks are little changed as tech shares wobble, Fed highlights inflation risk (CNBC)

• Fed Minutes Show Officials Were Eager to Slow Interest-Rate Cuts (Bloomberg)

• Last Time Bond Yields Surged Like This, Stock Markets Sank (Bloomberg)

• Citi Wealth Says Treasuries at 5% a Buy as Yields March Higher (Bloomberg)

• Private sector companies added 122,000 jobs in December, less than expected, ADP says (CNBC)

• Hedge funds turn cautious on stocks to start 2025, dumping shares at fastest pace in 7 months (CNBC)

• This January indicator is an ‘early warning system’ for how the year will go (CNBC)

• Your Fancy, New ETF Might Be a Little Too Fancy (WSJ)

• HSBC double downgrades AMD, says chipmaker will fall due to strong AI competition (CNBC)

• Why Nvidia Needs to Appeal to a Bigger Crowd (WSJ)

• FanDuel Parent Warns: NFL Bettors Won Too Much (WSJ)

• Ackman Chases 1,200% Profit on Trump Trade That’s Far From Over (Bloomberg)

• Markets Sounds Alarm Over Deflationary Spiral in China (Bloomberg)

Today’s On The Tape is Presented by Betterment

The Bond Market’s Warning for “The Fateful Eight”

Dan Nathan and Guy Adami focus on the market's reaction to NVIDIA's keynote at CES, its subsequent stock performance, and the broader implications for the semiconductor industry and 'Fateful Eight' stocks. The conversation extends to economic indicators, including Fed minutes, interest rates, bond markets, and their impact on overall market performance. They also touch on topics like high valuation tech stocks, small-cap indices, banking deregulation, and Meta's controversial change in content moderation policies. The episode wraps up with a market overview, potential influences on investor sentiment, and insights on upcoming major economic data releases.

What’s Next?

Over the past few days, we've highlighted the VIX as a potential underlying market indicator. Currently, it suggests a slight increase in near-term uncertainty, coinciding with the recent sideways movement in the SPX. The daily index ranges have been expanding during this period, and the VIX, which reflects the cost of near-the-money options within a 30-day window, shows that investors are paying slightly more for short-term options. The SKEW index, which tracks out-of-the-money (tail risk) options, has remained elevated for a while, indicating that investors are positioning themselves to hedge against either a sharp sell-off or a strong rally above previous highs. So far, neither scenario has materialized.

The VIX continues to expand and contract as the SPX fluctuates within its recent range. The last notable VIX spike occurred during the post-FOMC selloff in mid-December, where it reached 28 before retreating. Since then, the market tested the lower bounds of its range, but during that test, the VIX only rose to the high teens. This relatively subdued VIX move occurred within a low-volume holiday trading week. If the SPX were to re-test those levels (around 5840) on higher volume—such as what we saw yesterday—the VIX would likely climb back above 20.

A failure to hold that SPX level could drive the VIX into the upper 20s again, potentially triggering larger intraday moves. In such a scenario, a “short gamma” effect could emerge, creating an air pocket down to SPX 5700 and presenting a possible “buy the dip” opportunity at that level with the VIX near 30.

Conversely, if the market holds its recent range lows and moves toward prior highs, nervousness may persist until new highs are reached and rising treasury yields ease. Even then, the VIX could remain somewhat elevated as traders pursue speculative options, particularly in trending sectors like semiconductors and AI. In this case, the VIX might stabilize around 15–16, rather than dropping to the 12 level observed in early December.

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