JPMorgan trader: "Liquidity pressure" is the main reason for the sharp decline in US stocks in November.

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Overnight, US stocks broke through key support levels, with the S&P 500 index falling below the critical support of 6725 points, both the S&P and Nasdaq losing the 50-day moving average, and the Dow experiencing its worst three-day performance since April.

JPMorgan macro futures and options sales trader Marissa Gitler recently pointed out that stress in the repo market is the main reason for the reversal in the stock market this month. Despite noise surrounding the artificial intelligence narrative in the market, tight liquidity is the core factor driving the market down, and limited access to cash for leveraged funds has intensified the pressure on position unwinding.

The reopening of the US government is seen as a key turning point in alleviating repo market pressure. Due to the government shutdown, the increase in the Treasury General Account (TGA), and the combined effect of quantitative tightening (QT), the US Treasury previously absorbed a large amount of capital, leading to worse cash accessibility in the system. Although the government restart cannot completely solve the problem, it will help ease liquidity pressure.

The market's technicals are still at a critical juncture. JPMorgan's tactical positioning monitoring indicators show that the market has not reached the attractive "buy" setup conditions, and is nearing index levels that may trigger systematic selling by traders, making the performance of technical support levels crucial.

Repo Market Tension Hits the Stock Market

In her analysis, Gitler emphasized that when the Secured Overnight Financing Rate (SOFR) comes under pressure, leveraged funds' risk-bearing ability declines. A concept discussed in the Nov. 12 NY Fed meeting shows that during the current period of stress, the private repo rate has risen above the Interest on Reserve Balances rate (IORB). This indicates that the supply of reserves in the banking system is below the recent total demand, making the competition for reserves more intense.

This situation arises because financial institutions not qualified for IORB access (such as money market funds and hedge funds) raise rates in the repo market to attract cash. Gitler further pointed out that SOFR rates under pressure likely mean leveraged funds are being told by counterparty banks that they cannot receive the same repo quota as before.

The ability of leveraged funds to obtain cash through repo trades is constrained, which is their key tool for leverage. Lack of cash accessibility leads to position unwinding, suppressing the pace of investment. After increased financing pressure at month-end and quarter-end in October, JPMorgan's beta factor index and highly concentrated AI-related stocks declined, and this is very likely not a coincidence.

Liquidity Indicators Show Signs of Easing Pressure

JPMorgan believes repos are the lifeline for ensuring the normal functioning of the US dollar money market. As SOFR falls relative to the federal funds rate, this is a positive signal, indicating the degree of liquidity scarcity is decreasing.

Functionally, the Effective Federal Funds Rate (EFFR) is the unsecured interbank lending rate, while SOFR is the secured rate between banks and funds. Generally, the secured rate should be lower than the unsecured rate. While there is still pressure (otherwise SOFR would be lower than EFFR), the current downward trend in SOFR is a positive dynamic change.

As of last Friday, the Treasury's cash balance rose to $961.9 billion, an increase of $19 billion from the previous day. With the release of TGA and the imminent end of quantitative tightening, liquidity pressure in the system is expected to ease, allowing investors to focus again on investing rather than liquidity management.

The Market Still Needs to Cross Technical Thresholds

Even though there are signs of improvement in liquidity conditions, the risk outlook is not yet fully optimistic. JPMorgan's positioning intelligence team believes there's still a way to go before triggering the attractive "buy" setup.

The bank's tactical positioning monitoring indicator is currently at the 65th percentile, with a four-week change of -0.8 standard deviations (while triggering the attractive setting requires -1.5 standard deviations). Meanwhile, the market is testing or approaching levels that may trigger systematic selling.

The market has reached such index levels that if there is further decline, "mechanical" selling will push the market down another notch. Gitler summarized that in the current environment, it's very important to closely watch technical support levels and trigger points.

Risk Warning and DisclaimerThe market carries risks, investing requires caution. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation, or needs of any specific user. Users should consider whether any opinions, views, or conclusions in this article suit their particular situation. Investing based on this is at your own risk. ```