Macro Theme:

Short Term SPX Resistance: 5,120

Short Term SPX Support: 5,000

SPX Risk Pivot Level: 5,200

Major SPX Range High/Resistance: 5,300

Major SPX Range Low/Support: 5,000

‣ Monday & Tuesday flows could be supportive of equities based on charm + vanna flows. Accordingly, this may be an interesting place for call flies that profit on a move into +5200, as we’ve seen sneaky rallies on the Tuesday before VIX expiration (4/17), as vol could be shoved lower due to expiration mechanics.*

‣ A risk-on window then opens up on Wednesday AM with VIX expiration (4/17), and extends into Friday OPEX*

‣ <5,000 we are on watch for a more significant volatility event*

*updated 4/16

Founder’s Note:

Both ES +20bps to 5,115. NQ futures flat to 17,890.

Key SG levels for the SPX are:

• Support: 5,050, 5,026, 5,000
• Resistance: 5,077, 5,100, 5,120
• 1 Day Implied Range: 0.6%

For QQQ:

• Support: 430, 420
• Resistance: 435, 440

IWM:

• Support: 195, 190
• Resistance: 200, 205

42 & 52 week TBill auction at 11:30AM ET, Powell speaks at 1:15PM (Moderated Discussion with Tiff Macklem, Governor of the Bank of Canada)

Equities gapped higher on yesterday’s open, but news about escalating Middle East conflict sent the SPX -2% from the AM intraday highs, to close on the lows near 5,060.

With that, the VIX closed to 6 month highs at 19.25. Tomorrow AM is VIX expiration, and we felt that event could lead to some interim strength in equities as VIX calls were/are cleared out. Clearly, any related vanna bid wasn’t strong enough to overcome higher geopolitical risks, but we keep an eye out for the potential for that to happen, today. With that, we see first resistance at 5,077, then 5,100 & 5,120. Conversely, there is small support at 5,050, then major, long term support at 5,000.

Let’s take a step back here for some context.

The S&P500 is down 4% from highs seen near April 1st, and those highs were just a shade from all-time highs near 5,260. The S&P is stil up ~6% YTD.

The daily moves seem to be rather controlled/contained. And, therefore, despite how this may feel, SPX realized volatility [RV] (below) is rather benign, as you can see below. 1-month RV (green) = 11.7%, and 5-day (red) is 13.5%. Recall that 16% IV or RV roughly equates to daily moves in the S&P500 of 1%.

Speaking to the low RV, this is the SPX over the last 5 days – its really just been a grind lower.

Despite this pretty tame realized volatility, the VIX is at 19. We can place this in context by comparing 1-month SPX RV vs the VIX, and as you can see this spread is certainly elevated, but not yet at extremes (blue dashed line). The takeaway here is that the VIX is “rich”, but maybe not “overbought”.

If we zoom out on the VIX, you can see that we’re just coming up off of post March ’20 Covid-Crash lows.

What brought us to this review was this note in the WSJ, today, with the following headline:

In it, the prime arguments are sentiment (bearish), and the fact that selling, thus far, has been rather benign:

The scale of the selloff was also small [Monday]. Sure, the S&P 500 had its biggest drop in a day since January. But a near-1.5% drop once every three months is nothing, and really nothing compared with what happens in a true bubble. In January and February 2000, as the dot-com bubble was nearing full inflation, stocks dropped 1.5% or more seven times, more than once every two weeks.

The author here seems to make the argument that the selling is over, and maybe he is correct as the SPX nears major short term support at 5,000. Further, VIX expiration & OPEX this week could offer some respite, as VIX calls/put options are cleared out.

The other side of this coin, though, lurks the idea that selling has not yet started. We think that the headline above is the result of falling victim to the illusion of liquidity, due to the fact that hedging flows are supportive of equities. And while we are now on watch for a short term rally, we wanted to outline a more “macro thought” below.

2 weeks ago we gave a +40 minute presentation on the state of volatility, describing the low volatility as rather unprecedented. Certainly it is/was unlike anything we’ve seen since 2017. The context of that argument is systematic/hedging flows like 0DTE & massive positive-gamma-inducing call overwriting funds serve to suppress volatility. Further, there has likely been a larger short vol/put trade on as signaled by metrics like skew. We also had record low correlation, and high dispersion (see this note), which we’ve argued are “features” of these systematic flows.

Skews have shifted higher/normalized the last few days (see y’days note + 19 VIX) as traders likely do not want to be caught short vol into another major war, but the underlying equity price action seems not quite capitulatory. For reference, consider the VIX premium chart above, and single stock

put volumes

, below.

If the dealer community has been supplied with positive gamma, and positive vega (from vol/put selling), one can argue that they have been in a posture to supply supporting liquidity into equity selling. These flows are essentially buy-the-dip flows which would temper downside equity price action (aka reduce volatility). The positive gamma starts to wear away as equities retreat, and a dealer long vega position could flatten if demand for volatility hedges increases. Further, as we posited last week, if there becomes a true risk-off event, traders may not find respite in bonds due to equity/bond correlations breaking down. In this case, the only way to reduce equity exposure would be to 1) sell your stocks, or 2) get long volatility (i.e. buy puts/VIX calls).

For weeks (see Apr 1) our notes were flagging 5,200 as the risk off level, with 5,000 as the major, long term support line. We can now look at 5,000 as a level in which equities have just experienced a modest correction, and mean reversion (i.e. a strong bounce) could be at hand. This is particularly true if there is a short term pause in geopolitical escalation, which may now combine with OPEX to bid up equities in the short term. Further, from a slightly longer term scenario, earnings are around the corner, and positive chip-sector earnings could give equities a bullish narrative to grab onto. Lastly, Powell + FOMC isn’t until May, so things on the rate front may settle until then.

However, below 5,000, we think a lot of these systematic flows that have been suppressing volatility/supporting equities dissolve, and we need to start thinking about a more material realized volatility. What does that look like? This doesn’t have to be an “end of days” scenario, as there is plenty of room for volatility to move higher. Consider that it has now been 423 days since there was a <-2% 1-day move in the SPX, the 3rd largest stretch in the last ~20 years (see full stats on this, here).

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