S&P 500 Rally Faces Uphill Battle Against Liquidity Tightening

The recent rally in stocks has been driven by forces other than liquidity tightening, according to Michael Kramer of Mott Capital Management. Despite heavy T-bill issuance over the next few weeks, which should continue to impact market liquidity, the gamma squeeze appears to have run its course.

Net options volume has shifted back toward puts leading calls after a sharp surge in activity earlier in the week. This shift indicates that dealer hedging is no longer amplifying market moves, and instead tends to dampen them.

Kramer notes that equity repo financing activity has declined in recent weeks, which could suggest that forces other than liquidity are driving the advance. Additionally, increased currency hedging due to U.S. and Japanese policymakers' efforts to prevent further yen weakness may divert dollars away from the equity market and reduce a source of liquidity.

As a result, Kramer expects the market to return to its pre-gamma squeeze environment, characterized by slow and grinding price movements.