Macro Theme:

 

 

Founder’s Note:

ES futures are -40 bps to 5,509. NQ futures are -50 bps to 19,950.

Key SG levels for the SPX are:

• Support: 5,460, 5,450, 5,420, 5400
• Resistance: 5,500, 5,510
• 1 Day Implied Range: 0.67%

For QQQ:

• Support: 480, 479
• Resistance: 490

IWM:

• Support: 200, 190
• Resistance: 204, 210

Powell ECB Policy Panel 9:30AM ET

TLDR: We give edge to the SPX pushing back toward 5,500 as short term events + a holiday suppress IV’s, and lift stocks. However, should the SPX break <5,450, we would look for a quick move to 5,400.

Its been two weeks of what essentially amounts to a 50 handle range in the SPX (5,450-5,500). This is serving to drag down realized volatility[RV] in the SPX, with 1-month RV near 6% – lows not seen since Nov ’21. Lower RV should serve to drag down forward, or implied volatility [IV], in turn. We think this lifts stocks.

Historically, such a period of calm is not all that unusual, as shown below (data 2017 to present).

While lower RV should drag IV down, we instead see SPX IV as holding some premium. This suggests there is some demand for long volatility hedging. You can most simply see this below in this plot which measures the VIX vs 1-month SPX RV. As shown, our plot is above the long term mean (red dashed line) implying that today’s ~12.7 VIX would typically be closer to 11 based on average spread between VIX & SPX RV.

If IV/VIX were to shift lower to match current ~6% RV’s, it should provide a vanna-lift for equities.

So, whats the problem?

First, we see higher rates over the last several days. Shown here is the US 20 year yield (gold) vs SPX. Some suggest this is linked to Trump‘s increasing odds and potential policy impacts, and while we have no comment on that, rates did appear to lift after Thursday’s debates. Regardless of cause, higher rates are a drag on equities. In the short term, we’re not so sure how sticky these higher rates are.

Second, equity vol in Europe remains elevated due to French politics. Below is the VSTOXX, which is the “VIX” for Euro STOXX. Its off of recent highs, but remains elevated. This EU vol bid could have led to some US VIX demand, too. It seems as if EU equities are recovering a bit, but we are far from experts in EU politics.

Last, but certainly not least, is leadership. Shown below is NVDA, and the leading semi-sector, which lost its momentum at June OPEX. This results in a lack of index constituents to drag the S&P higher. With the SPX still blanketed by positive gamma and 0DTE volume that brings mean-reversion, things have stalled. Recall there was a massive removal of single stock calls in June OPEX, and that complex needs to be rebuilt (i.e. long calls need to build back up).

While we can wring our hands about potential risks and why IV isn’t hitting fresh lows, if we zoom out the fact is that IV’s are very quiet. In the short term there is a slight IV premium for Powell this AM, FOMC mins tomorrow, and NFP on Friday. As this is also a holiday week, we’re sure that traders are just hoping that these events/prints are in line with expectations, so they can head to the beach. We continue to believe that benign data prints should zap event-vol premium, which lifts equities higher (SPX to 5,500).