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 up 20bps to 4,300. Key SG levels for the SPX are:

• Support: 4,250, 4,211 & 4,200.
• Resistance: 4,300 & 4,313
• 1 Day Implied Range: 0.81%

Traders are anticipating some volatility today due to the 8:30AM ET NFP. Today’s ATM straddle is $40 or 93bps (ref 4,270, IV 33%). Longer term expectations around volatility remain more muted, with IV’s at longer term expirations near 16%.

The market is therefore reading today as a key short term

pivot,

as the S&P currently sits in a neutral price zone of 4,200-4,300. We think a break of SPY 430 to the upside signals a likely test of 4,400, whereas a break of 4,200 may lead to an extended drawdown until next weeks CPI.

These IV’s are, of course, rather elevated vs those of recent weeks, as can be framed with the VIX currently at +18, vs 13 in mid Sep. Meanwhile 1 month realized in the S&P is ~12%, as shown below (green). Through this lens we think the S&P decline has been a “grind”.

Below is the spread between 1 month realized SPX volatility, and the VIX. As you can see the premium of the VIX over realized volatility is rather high, approaching the 90th %ile. Essentially, traders are pricing in larger moves than are being delivered. Some of this is obviously hedging against the specter of higher rates.

The issue here is that the carry is going to start weighing for those long vol, particularly without the justification of higher rates. IV naturally wants to mean revert, and if its not being fed larger realized moves it becomes a bit harder to maintain this vol premium. Said another way, put buyers are going to start “feeling the burn” of decay.

A positive NFP number likely sparks downside volatility, with 4,200 large support for today. Further, in this downside scenario there probably an anxiety-hangover into next weeks CPI/FOMC mins.

Traders need to be equally attuned to the chance that a bad/flat NFP number could trigger upside volatility, too. We remain of the view that a break >430 SPY (4,315 SPX) could be the trigger that releases some of this vol premium, and a quick run up into 4,400.