Macro Theme:

Short Term SPX Resistance: 5,100

Short Term SPX Support: 5,000

SPX Risk Pivot Level: 5,000

Major SPX Range High/Resistance: 5,100

Major SPX Range Low/Support: 4,800

‣ We see 5,000 as major support into an upcoming risk-on window then opens up on Wednesday AM with VIX expiration (4/17), and extends into Friday OPEX*

‣ 5,100 is now our max high into Monday (4/22)

‣ <5,000 we shift back to “risk-off”, and would be on watch for a more significant volatility event, with next support at 4,800*

*updated 4/17

Founder’s Note:

Both ES -30bps to 5,035. NQ futures -50bps to 17,460.

Key SG levels for the SPX are:

• Support: 4,976, 4,950, 4,900
• Resistance: 5,000, 5,106, 5,050, 5,100
• 1 Day Implied Range: 0.57%

For QQQ:

• Support: 420
• Resistance: 425, 430

IWM:

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

Equity futures (ES, candles) dropped -1.5% overnight, and subsequently recovered, after Israel responded to Iran. This temporarily spiked VIX futures (orange), as well. Futures recovered as some argued the Israeli response was limited, which may now ease tensions going forward. On this point, crude was +4% at overnight highs to $90.8, and is now down 1%, to $86.

These overnight equity moves oscillated around the large 5,000 strike. We continue to view this area as major support, with traders also eyeing the 4,980 JPM collar long put strike as a key level.

We have been holding two views, first, after marking <5,200 as a risk off level weeks ago, we have seen the 5,000 area as a line of major equity support that could fuel a strong equity bounce. Equities clearly have found little support this week, and are testing 5,000 this morning.

Our second view was/is that under 5,000, equities face the specter of a significant shift higher in volatility. While, yes, the SPX is -5% this month, the daily volatility has been rather contained as outlined in yesterday’s note. Stated more simply, this has been a long “controlled descent”. Under 5,000 we should start to see a pickup in realized volatility.

Putting some data to this, below we’ve plotted consecutive negative 1-day returns for SPX, and yesterday marked the 4th consecutive negative day. That ties for 5th longest in the last 5 years, with only 3 occurrences of 5 negative days (Sep & Oct ’22, Jul ’19), and one occurrence of 6-straight negative sessions (Feb ’20). More interestingly, during those periods with >4-consecutive negative returns the VIX was well above 20.

Our call for higher volatility <5,000 would be due to the shift of options positions from a place of call/put balance, to predominantly puts. You get a sense of this through the Combo plot below, with negative bars resulting from larger relative

put gamma.

We argue that puts drive volatility, either through the dealer negative gamma that long buyers invoke, or through the dealer negative delta that come from short-put-cover. Further, when equities move lower, it generally comes with higher implied vol, which adds to equity-negative vanna flows.

Additionally, we’ve been on the view that there are many mechanical flows that have been suppressing volatility. This has been sourced from a macro level by accommodative rate policies, and within that lies flows from 0DTE options, systematic call overwriting, and put selling (see explanation here). As rate cuts are priced out, and equities move lower, we believe it starts to wear away at these flows that have been reducing volatility.

Consider, for example, correlation. One of the hallmarks of this equity market was low equity correlation, and weak breadth. We believe that the low options-implied correlation (3 month CBOE correlation, below) is driven by these options flows that reduce daily trading ranges in the SPX: large dealer positive gamma from call overwriting, and 0DTE buying dips/selling rips. Meanwhile, traders ran into long single stock calls, which drove their implied vols relatively higher.

As you can see below, implied correlation is still well below previous years, suggesting that related flows have not normalized. Normalization, we believe, would come from a true bear market move – and this is what we think forms <5,000. The normalization of flows corresponds to the normalization of volatility, which, from this current low vol regime, would likely be higher.