Macro Theme:

Short Term SPX Resistance: 4,300

Short Term SPX Support: 4,200

SPX Risk Pivot Level: 4,315

Major SPX Range High/Resistance: 4,400

Major SPX Range Low/Support: 4,200

‣ >430 SPY (SPX 4,315) may mark a sharp rally to 4,400 SPX. Rallies into 4,300 SPX should be considered “suspect” and subject to quick reversals. The S&P needs to break that key SPY 430 level to confirm strength.*

‣ <4,200 SPX may mark a sharp increase in volatility*

*updated 10/5

Founder’s Note:

ES Futures are down 25bps 4,285. Key SG levels for the SPX are:

• Support: 4,250, 4,217 & 4,200
• Resistance: 4,268, 4,300 & 4,313
• 1 Day Implied Range: 0.82%

TLDR: We see some signs of capitulation in rates – at least in the short term. This is important as an equity rally (a potentially violent one) is likely predicated on a pause/reversal in rates. Key upcoming datapoints are likely to reinforce either the bearish or bullish narrative, which could trigger to some large equity moves. Today we see Jobless Claims at 8:30 AM ET, with NFP tomorrow. Bulls have edge on a break of 430 SPY. Bears take the baton <4,200 SPX.

While “not much” happened in terms of S&P price action yesterday, there was some recovery in the “Mag7” (AAPL, MSFT, GOOGL, etc). These are the narrow leaders that have been outperforming, and should continue to do so if a larger equity rally occurs (consider selling broad Index/ETF upside to fund relative upside bets in these megacap tech names).

However, outside of those top stocks, equities were generally positive with the exception of energy (XLE, -3.1%).

Whats interesting about this is that the Equity Put/Call Ratio reflected a very put-heavy reading yesterday, as shown in the chart below. This, despite stocks being broadly higher.

What we see under the hood is not major

put volumes

in those leading tech stocks, but massive puts in the most interest-rate-sensitive underlings. This syncs with some of the

HIRO

put flow alerts we’ve been seeing in financials, utilities and the like. Further, an equity rally, it seems, would be triggered by a pause and/or reversal in rates.

Below are charts of TLT followed by HYG. In blue is the total

put volume,

and as you can see the volumes are huge – particularly in the case of TLT (ishares Long Term US Bond ETF). While its true there was a corresponding jump in calls earlier in the week for TLT, there was a large gap between puts/calls yesterday.

HYG:

Below is Dec skew for TLT, wherein we can see that IV’s deflated yesterday from Tuesday. We also note a drop in term structure, too. This signals that the downside pressure may be coming off (at least in the short term) as traders appear to be selling puts. This relief could, of course, be fleeting, but is critical to monitor.

There is still a lot of negative gamma + vanna that could unleash a very sharp rally up into the 4,400 area. Should stocks recover 430 SPY it reinforces the idea of a move to 4,400, as breaking that level likely triggers a release of pent-up volatility premium.

The downside view we expressed yesterday remains intact, with a break of <4,200 signaling a new leg higher in volatility.