Macro Theme:

Short Term SPX Resistance: 4,900 (SPX Call Wall)

Short Term SPX Support: 4,850

SPX Risk Pivot Level: 4,800

Major SPX Range High/Resistance: 4,900 (SPX Call Wall)

Major SPX Range Low/Support: 4,700

‣ 4,900 – 4,915 is our target high into 1/31 FOMC.*

‣ A downside break of 4,800 is our interim “risk off” level.*

‣ Traders, and SG models, are pricing in low volatility/risk into 1/31 FOMC*

*updated 1/24

Founder’s Note:

ES Futures are higher by 44bps at 4,915. Key SG levels for the SPX are:

• Support: 4,865 (SPY 485), 4,850, 4,826, 4,815, 4,800
• Resistance: 4,874, 4,900
• 1 Day Implied Range: 0.67%

For QQQ:

• Support: 422, 420, 400
• Resistance: 430

IWM:

• Support: 195, 190, 187
• Resistance: 197, 200

TSLA reports after the bell, with an implied move of 5.9%.

SPX & SPY

Call Walls

are now in sync at 4,900/490 creating a clean resistance area at 4,900-4,915 (SPY 490). SPY 485 (SPX 4,865) is the major support level, followed by 4,850. These shifts are the result of the cadence of rolling short dated options positions, which results in tighter trading ranges, and lower volatility. These flows should continue to dominate into next Wednesdays 1/31 FOMC. The QQQ Call Wall has also rolled higher, to 430.

While Index vol continues to tank, single stock vols are expanding due to both narrowing leadership (tech), and into earnings seasons. For example, this morning we see NFLX post ER +10% to 542, which beats its ~7% estimated move (side note, we see $550 as where upside gamma runs out on NFLX).

The CBOE offers a 1-month correlation Index (COR1M) which measures the IV of S&P500 options vs those of the top 50 stocks in the S&P500 Index. This metric is now hitting lows, last seen into the June earnings season when there was a major chase into AI stocks.

A high value for the COR1M indicates a high degree of correlation, meaning the stocks within the S&P 500 are moving more in sync with the index. Low COR1M readings suggests a lower degree of correlation, indicating that the movements of individual stocks are less in line with the overall index. We’ve plotted COR1M in the lower pane of the chart below, with several different Index & sector ETF’s in the top plot.

Lows in correlation generally come with highs in stocks, as certain sectors break higher like today, and in Nov ’21. In recent history the major outperformance has come from tech, as you can see below (XLK tech ETF = green).

Peak correlation was during the Covid crash, wherein all stocks crashed.

As you can see above, there is a rhythm, or wave to how correlation & equities move. These peaks and troughs seem to coincide with general periods of fear & euphoria, as correlation declines when traders speculatively chase individual stocks (and themes) higher, and then all stocks tend to sell off in unison due to macro concerns (wars, higher rates, etc). What’s interesting from the options perspective is that there is something of a lower bound in correlation (black line, lower chart), because there is only so low that SPX IV can go.

Consider current short dated IV’s wherein next weeks ATM SPX is an 8.7%, and 1-month, post FOMC IV’s are 10%. This backs out to traders pricing just 56bps daily moves in the SPX through FOMC. We did a quick check since Jan ’18, and the average close/close change in the SPX is 88bps, with the open/close average being 70bps. Seen through this lens it does seem that one can objectively say SPX IV is rather low.

These low IV’s can last for some time, but the general point here is that current readings are starting to suggest overbought conditions as Index vols are priced for risk-less perfection, and single stock vols expand due to upside chasing.

Single stock vols should naturally come down after earnings, but we are also likely to have seen a lower bound in Index vols that is interestingly syncing with FOMC. We hesitate to immediately start flipping the “risk flag” after focusing on twin risks of Jan OPEX & low IV’s, and we’d note that basic 2-3% SPX drawdowns seem to result in “normalizing” of these vols.

We want to touch on one quick point that the lows in IV’s may not purely be the results of traders speculating via pure short volatility, as there are a lot of mechanical flows now which result in suppressing index volatility. For example there are the short volatility ETF’s, which are growing rapidly in size. This chart below is a bit dated (Aug ’23), but conveys the general theme. The largest of these ETF’s are the call overwriting, which add’s systematic positive gamma to dealer positions. As both assets grow in these ETF’s, and the market rallies into where these various calls are struck, the positive gamma increases which serves to suppress volatility (and drive Index IV’s lower).