Macro Theme:

Founder’s Note:

Futures are +15bps ahead of NFP and a possible ruling from the Supreme Court on tariffs.

Today’s straddle is $42/60bps, implying mild risk into today’s data points. This is quite a bit richer relative to the 40bps straddle from yesterday, which speaks to today’s data having more impact vs Jobless Claims.

Given this, we continue to see a grinding/chopping market if the SPX holds >6,900. This grind is driven by positive gamma in the 6,900-7,000 range. With the passing of NFP, vol may contract a bit, and that could add positive drift which may push SPX toward 7,000.

<6,890 we would flip to a risk-off stance.

While the SPX has stalled, small caps, DJIA, and equal-weighted SPX (RSP) have performed strongly over the last week. You can see the outperformance below, with IWM surging 4.5% in the first 9 days of Jan. This of course speaks to rotation, as investors allocate amongst equities to best position. This, vs allocating across assets. You can tie this rotation idea into our low equity correlation (i.e. COR1M) environment – this environment is about an alpha-chase, not a risk-protection/mitigation regime.

Our concern with this low equity correlation is the potential for a volatility spasm, which would correct the imbalance between single stock and index vol. The trouble with this, is timing. A benign passing of NFP likely leads to a “risk-on” Friday, as traders head into the weekend. When you turn to something like the potential Supreme Court ruling, we have little view on potential impact but that feels like a potential curve ball that could catch traders off guard. We can’t help but recall Trump’s 10/10 tweet(s) that sparked a 1-day 2-3% decline (from a very low vol position).

That said, we’re simply not going to bet on “upset” until/unless SPX <6,890.

If you look at something like SNDK, which we highlighted yesterday AM, its +75% Skew Rank and +75% IV Rank scream instability, as traders bid calls. The stock went into yesterday AM +40% on the year, purged -15% into mid-day, then rallied 8% from lows. Other related stocks saw similar volatility, and it speaks to the instability of this environment, which is cloaked by the real lack of movement of the SPX over the last week (i.e. SPX stuck in 6,900-6,950).

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