Macro Theme:

 

 

Short Term SPX Resistance: 4,950 (SPX Call Wall)

Short Term SPX Support: 4,900

SPX Risk Pivot Level: 4,800

Major SPX Range High/Resistance: 5,000

Major SPX Range Low/Support: 4,820 (SPY 480)

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

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

‣ We look for a sharp directional move post-FOMC & into 2/16 expiration, with 5,000 the key upside strike. Major downside “risk-off” occurs on a break of SPY 480, which is our first major support.*

*updated 1/30

 

 

Founder’s Note:

ES Futures are flat to 4,952. Key SG levels for the SPX are:

• Support: 4,900
• Resistance: 4,920 (SPY 490), 4,950
• 1 Day Implied Range: 0.67%

For QQQ:

• Support: 423
• Resistance: 430

IWM:

• Support: 196
• Resistance: 200

Things are light on the macro data side until 1/31 FOMC. However, there are a slew of important earnings today including:

‣ Tuesday, Jan 30 (PM): AMD, MSFT, GOOGL, and SBUX

‣ Wednesday, Jan 31 (AM): BA and MA

‣ Wednesday, Jan 31 (PM): QCOM

‣ Thursday, Feb 01 (AM): RCL, PTON, and MRK

‣ Thursday, Feb 01 (PM): AMZN, AAPL, and META

‣ Friday, Feb 02 (AM): XOM, CVX, ABBV, BMY, and CI

Today there is Case-Shiller & JOLTS data out at 10AM ET.

The SPY

Call Wall

has shifted to 495 (from 490), with the SPX

Call Wall

shifting to 5,000 (from 4,950). The QQQ & IWM

Call Wall

s hold at 430 & 200, respectively. This rolls our “fair value” range from 4,850 – 4,900, to more like 4,900 – 4,950. Because the

Call Wall

s have rolled up in the SPX, we do not have an overbought condition.

We saw very clear signals that traders were selling short dated 4,950 calls into yesterday’s late-day strength which adds to resistance above for today. As you can see below, SPY 490 & 495, along with SPX 4,900 & 4,950 are now the most prominent gamma strikes on the board. This all implies that today should hold to our fairly tight 67bps implied move, with SPY 490 (SPX 4,920) – 4,900 being major support.

We also highlight the SPY 480 downside strike, as if the Fed disappoints tomorrow, we see that as the first major support.

Pivot

ing to yesterday’s flow, our largest ever positive S&P500

HIRO

reading was $12bn on 1/8/24 (see bottom of this note), making yesterday’s $8bn figure a top 3 day. This pushed the SPX 75bps higher on the session, to close at SPX 4,927 which was just above our major resistance line of SPY 490, but in line with our 1-day implied move of 74bps. That is fairly muted positive performance given the size of these deltas, but we’d posit that there was a fairly large amount of positive dealer gamma that this flow was pressing in to (i.e. dealers needing to sell into higher S&P).

While we do not have any great insights into QRA, which is the current FinTwit fad, we can say that it was clearly the trigger for an influx of bullish options flows. Take the Mag 7

HIRO

indicator, shown below, which hits “engage” right at the 3pm ET release. While these aren’t massive flows, there was a very clear call-buying impulse on the data release.

What’s interesting about this is that the bulk of this call buying flow was > this Friday’s expiration, backing longer term bullish expectations. This can be seen in

HIRO’

s “All Exp” call flow in orange, vs Next Expiry flow in green. As a reminder both MSFT & GOOGL report today, after the close.

What caught our eye in Mag 7 names was the lack of call skew. As an example, we’ve posted the MSFT risk reversal metric which measures a 1 month 25 delta call vs an equivalent put. MSFT is up 10% this month to all-time-highs, but this does not yet appear to be driven by euphoric, call-buying FOMO. If the Fed is dovish, one has to be aware of the right tail risk of heavy call buying, which offers up the “blow of top” scenario. This is not hard to see if tonight’s earnings are decent, and Powell stays within expectations. The signal for “significantly overbought” are elevated call skews, and spikes in “spot up, vol up” metrics like the Risk Reversal data.

While those Mag 7 names arguably have some available room for call buying, the SPX skews are signaling a heavy long.

Per a recent CBOE report:

 SPX 3M skew (25-delta spread) flattened to a new 10-year low last week (see Exhibit 3), driven by elevated demand for upside calls, with the 25D vs. 50D call wing rising to a 10-year high as well. Demand for upside calls remains most pronounced in small-caps, with the RTY skew screening the flattest across the major indices.

What’s interesting about this is that there are clear signs up long call demand, but there is also a lot of attention on the systematic option selling programs, particularly call overwriting funds like JEPI. This seems to wash out in an upside call skew, like the CBOE notes, but the skew chart below is also a feature of systematic, downside put selling. This is an embedded left tail risk that we are likely to carry for some time until some type of trigger leads to a jump in downside volatility which unwinds this downside volatility selling.