Macro Theme:

Short Term SPX Resistance: 4,550 Call Wall

Short Term SPX Support: 4,475

SPX Risk Pivot Level: 4,400

Major SPX Range High/Resistance: 4,450

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 4,517. Key SG levels for the SPX are:

• Support: 4,500, 4,475
• Resistance: 4,526, 4,540, 4,550
• 1 Day Implied Range: 0.68%

After a massive day on Tuesday, the S&P was unchanged yesterday, holding to the 4,500 area. We are now into the “window of weakness” which may extend into early next week.

The most noticeable change in the options landscape is from index options IV’s, which are now in the “contraction” phase. You can see this below in SPX term structure, with ATM IV’s now dropping <=10%. 10% IV implies traders are pricing in ~65bps daly moves in the S&P500, which is what SG models forecast, too. Also note the depression in IV’s for next week which is tied to the US holiday (traders are anticipating a quiet week).

These lower ATM IV’s also sync with some cooling in index/equity OTM call IV’s after the voracious bid on Tuesday, which signals a reduction in upside momentum (particularly into Friday’s call-heavy OPEX). This is particularly evident in the SPY fixed strike IV matrix, shown below. This compares IV’s from Tuesdays close to today, and the shades of red inform us that IV’s are declining at upside strikes (x axis). This reads to us as traders selling calls into the 460 area, particularly into next weeks holiday expirations.

So, we had this giant volatile thrust on Tuesday, and now that 4,500 price level seems to be settling in. 4,500 is a massive SPX gamma bar, and one that should help to hold in equity prices through Friday. Added to this is the large amount of equity calls set to expire Friday, which we believe leads to short term downside pressure/consolidation in equity markets (see yesterdays note). Accordingly, we continue to look for a move down toward 4,450 – 4,400, which would be a setup for a final Santa Rally.

Finally, we wanted to touch on the RUT/IWM complex. Yesterday we flagged that there were record levels of IWM calls on CPI day (1.4mm) and this sync’d with a +5% rally on Tuesday. The small cap index tried to add another 2% yesterday, before being rejected at the IWM 182

Call Wall

level.

The IWM flip to call positions from puts over 2 days has been rather remarkable. This is best seen through our Gamma Tilt indicator, wherein you can see the change from a put-heavy position (i.e. blue line at bottom of chart, bottom red arrow) to a very call-heavy position (top red arrow). This is put positions being destroyed not only due to the massive IWM rally, but also traders selling them in order to buy calls.

This call transition is also seen in implied vols, wherein skew has been pounded. The chart below shows Goldmans measure of 1-month put/call skew, with IWM in pink (h/t TME via ZH, also note that a our “risk reversal” metric in EquityHub shows similar data). As you can see this metric absolutely plunged over the last few days, suggesting, again, that traders dumped puts and bid up calls (bottom right red arrow).

This all strikes us as “too much, too fast”, and plays into our thesis that equities writ-large are due for a short term bout of consolidation here, particularly with 1/3 of IWM calls set to expire this Friday.

This leads us to the green boxes in the figure above. These green boxes flag local lows in this skew metric, which seem to appear at the end of the last 3 years – right around our current Nov/Dec window.

In the chart of IWM below (candles), we marked the general area of Nov OPEX over the last several years (black lines), which more or less corresponds to the green boxes, above (with SPY provided in yellow for comparison). As you can see, this low in skew has marked highs in the last two years, but was a major low in ’20.

The takeaway here is that its not “in the bag” that RUT/IWM continue this pace of acceleration, but we are in the camp of today being a bit more like the ’20 rally vs ’21 & ’22 selling. This is primarily due to the state change in the rate environment, wherein we are arguably now in a flat rate regime vs escalating regime over the past two years. We think the massive change in skew positions is traders not only covering their put shorts, but also setting up for further upside into year end based on the new rate narrative.

This, in our view, leads to IWM’s outperforming SPY over the next several weeks as traders likely build long call positions in IWM vs likely selling calls into SPY strength.

©2023 TenTen Capital LLC DBA SpotGamma