Macro Theme:

Short Term SPX Resistance: 4,558 (SPY 455 Call Wall)

Short Term SPX Support: 4,450

SPX Risk Pivot Level: 4,400

Major SPX Range High/Resistance: 4,558 (SPY 455 Call Wall)

Major SPX Range Low/Support: 4,200

‣ We anticipate the equity market high being Wednesday AM 11/15, with consolidation happening into & around 11/17th (Equity OPEX).

‣ This would clear the way for a final, year end rally. 4,600 is our current upside target, following the major CPI rally.*

‣ RUT/IWM could outperform SPX/SPY into year due to the change in options positions into Nov OPEX.**

*updated 11/15

**updated 11/16

Founder’s Note:

ES Futures are flat at 4,528. Key SG levels for the SPX are:

• Support: 4,500, 4,450
• Resistance: 4,523, 4,550, 4,558
• 1 Day Implied Range: 0.59%

In QQQ, support is at 385, 383 & 380. Resistance is at the 390

Call Wall.

IWM: Support 177 & 175, resistance at 180 then 182

Call Wall.

Today our

Call Walls

in the S&P remain just overhead at 455SPY/4,550SPX, with our 1-day daily range estimate contracting to an anemic 0.59%. This suggests a quiet day, holding around 4,500 is ahead. There is a T-bill auction at 11:30, and T-bond auction at 1pm ET. Some of these actions have recently been trigger points for volatility.

Zooming out, since Wednesday AM’s VIX expiration the range between the SPX high & low is 75bps, with the Index higher by 12bps. While this was certainly a shift in price action from the blistering CPI rally, our view has been that we’d enter a window of weakness for equities from VIX exp to tomorrow.

To recap our general stance:

Downside through this window could be driven by:

1. OPEX flows, which were call-heavy (see Friday AM note)
2. A crushing of implied vol

Following this week, we see equities staging a final rally into Dec 13th FOMC – Dec 15th OPEX, with SPX 4,600 currently our max upside target.

As this is a shortened holiday week, traders are pricing in particularly low movement toward the tail end of this week, due to Thursday’s holiday & Friday’s 1/2 day (green box, below). These ~9.5% IV’s imply 60bps expected daily SPX moves.

We think this is an important, as on its face is suggests that any material equity weakness into Wednesday will likely be met with vol sellers, seeking to carry theta over the holiday weekend.

The issue here is that current IV levels are priced for perfection, and so that theta decay isn’t worth much. This isn’t a “red alert”, just more of an opinion that there is currently little edge in being short near term options. The risk in these situations is that small pops in realized volatility can catch people off guard, leading to something a bit more material. For example, if one of the auctions or FOMC mins (11/22) has a bit of a tail to it, what would normally be a 50bps reaction would turn into a 100bps reaction as those that were short IV at 9% have to cover.

Currently 4,450 would be the downside level we’d look for support and mean version, and 4,550 to the upside, and this is well framed in our vanna model. Further we’d note that we do not have any material gamma strikes under 4,500 down to 4,450, lining up with a possible 4,450 test, should 4,500 break.

As you can see below, both of the models (purple IV-adjusted & gray unadjusted) curve up at higher SPX prices. This informs us that if the SPX continues to rally, dealer selling increases materially. Vanna flows to the upside are a small factor as any decrease in IV adds to dealers essentially having more to stock to sell into rallies). This also translates through a lens of positive gamma suppressing volatility.

However to the downside you can see the gray line troughs around 4,450, which is where we’d look for first material hedging support.

Also to the downside, if there is a true spike in IV/VIX (vs knee-jerk reaction), dealers would have much more stock to short, which is what’s implied by the IV-adjust line (purple) shifting materially higher to the left of the chart. We do not think this scenario is in play.