Happy New Year. I am back after taking the past three weeks off, which may have been the longest stretch without a free daily update in nearly 10 years of doing this. That said, not much has changed for the S&P 500, the 30-year Treasury, or, for that matter, the . It was almost as if the markets were frozen in time.
While it will be another 12 weeks before spring, the markets should begin to thaw. The implied volatility selling that really started around Thanksgiving and then reemerged during Christmas now appears largely complete. The calendar will no longer be the market’s friend. This is not to say there will not be days when markets are closed, but the combination of shortened trading weeks and half-days created an ideal environment for selling volatility.
The week of Thanksgiving saw the get crushed, and the week of Christmas produced a similar outcome.
Couple that with inferior trading volumes, and it created an ideal setup for stocks to rally modestly. Unfortunately, by the time we reached Christmas week, implied volatility was already too low, and there was not enough juice left in the market to push prices higher. It underscores just how important implied volatility selling has become to this market at this stage of the cycle.
The VIX 1-Day finished last week below 10. With everything going on globally and several major economic reports scheduled for this week, it would not be surprising to see the VIX 1-Day rise into the mid- to upper-teens by Friday. If that occurs, it likely implies a bearish bias at the start of the week.
The setup in the S&P 500 heading into 2026 is not much different from what we saw at the start of 2022 and 2025. In each instance, the index traded largely sideways, making only marginal new highs. Additionally, similar bearish divergences had formed in the relative strength indexes.
Additionally, in both 2022 and 2025, BTIC S&P 500 Total Return futures surged into year-end and then collapsed as the calendar turned. We have seen the same pattern emerge since mid-December as we move into 2026. Of course, we know what followed in those years: a sharp decline in the cost of equity financing, ultimately accompanied by a move lower in the major equity indexes.
The final piece is liquidity, and while the Fed has begun buying T-bills, it has had little to no impact so far, with reserves finishing the year at $2.85 trillion.
In fact, on December 31, SOFR traded 22 basis points over IORB. While that was not the highest level seen, it was close, and the issue is that the Fed’s plans to purchase T-bills will take time to become large enough to lower overnight funding rates meaningfully.
We likely will not know the full impact until Treasury T-bill issuance begins to ramp back up. Issuance was reduced in December, leading to net paydowns, which in turn pushed liquidity into the overnight market. However, that dynamic is likely to reverse sometime by mid-January.
It seems clear from this that settlement dates tend to push SOFR higher. As the flow of Treasury settlements changes, we could once again see the effects show up in the overnight funding markets. This means liquidity conditions will ease somewhat this week, but could tighten again as we head into mid-month. The liquidity constraints are likely not over.
Finally, the rose back to 4.2% this past week and is very close to breaking out. At least based on the chart, a move back into the mid-4.3% range now seems highly possible.