According to Tom Essaye of the Sevens Report, derivatives markets and speculators, rather than the Federal Reserve, are the primary sources of market liquidity. Essaye notes the changing dynamics since the late-2022 market lows. The positive correlation between the Fed's balance sheet and the broader stock market has weakened, prompting a search for liquidity's origin.

Essaye highlights that strong rallies often follow volatility spikes, suggesting leveraged put-writing and short-volatility strategies provide an "artificial tailwind." Dealers in options and derivatives must hedge their short-volatility exposure, typically through long equity positions. This behavior has been observed in the past, such as in 2016-2017 and early 2025.

Without the Fed's balance sheet expansion as a backstop, market liquidity increasingly relies on derivatives and speculators, directly affecting market movements. Essaye warns that low liquidity, high leverage, and a lack of Fed support elevate market volatility risks in early 2026. Investors should pay close attention to core market fundamentals.