Macro Theme:

 

 

Founder’s Note:

ES are +40 bps at 5,580, NQ futures are +75 bps at 19,864 & RTY futures are +25bps at 2,208.

Key SG levels for the SPX are:

• Support: 5,517, 5,500
• Resistance: 5,550, 5,560, 5,600
• 1 Day Implied Range: 0.54%

For QQQ:

• Support: 475. 470
• Resistance: 477, 479, 480, 483, 490, 500

IWM:

• Support: 215, 210
• Resistance: 220, 225

TLDR: We forecasted a period of weakness starting with Wednesday VIX expiration, and in through today/tomorrow (see 7/16 levels). Further, we’ve been highlighting 5,500 SPX as a critical long term support level/target into this time frame, and this level was tested on Friday PM. In the QQQ’s, we saw support coming in at 480, with a reduction in negative gamma below that level. The Q’s closed at 475 on Friday, indicating Nasdaq is now oversold. Accordingly we are looking for at least a short term bounce in equities, with SPX moving back near 5,600, 480 in the QQQ’s.

Further, we continue to like the short the concentrated SPY vs long the equal weighted S&P500 via the RSP ETF trade identified here.

Lastly, in IWM’s there were big positions at 215 for Friday, with the IWM low on the day being 216. We have been, and continue to look for a test of 210 early this week, as the nosebleed-level call skew flattens out.

We do not highlight correct calls on the stock pullback to be self aggrandizing, but to place into context the recent spate of selling which occurred into heavy positive gamma, and options expiration(s).

There has been a big uptick in bearish narratives prevailing over the last several days – mostly with those viewing the market through a non-options lens. Understanding that options flows were/are a major driver of equity movement can help us look more rationally look forward.

Before we move forward, as we noted Friday, this July OPEX syncs up well with April OPEX lows, both marked on the plot below.

Our core lens of viewing markets has been through that of the dynamics between large, concentrated single stocks, and their impact on the indexes. This matters from not only a relative price perspective, but also a volatility perspective.

For reference, we’ve covered these topics in depth several times in recent Founder’s Notes, and in videos starting in April, in Member Q&A’s such as here, and into OPEX.

As concentrations of specific single stocks have reached to near all-time highs, we’ve seen a multitude of market behaviors not seen in many years. Here are just a few:

1. Record low forward correlation metrics – stocks aren’t moving in the same direction
2. Largest ever spread between vol-elevated single stock vol and vol-suppressed SPX
3. 1 month VIX beta to S&P is at 0th percentile (i.e. VIX has been “unlinked” from SPX)

This all matters because we believe that the way these extreme and unusual behavior normalize is ultimately through a large stock market correction, on the order of 5-10%. The trigger could be a macro issue, like rates/credit and/or geopolitics, or poor earnings in chip sector names.

If anything, we seem likely to get a rate cut in the next few months, and so the rate/credit issue is currently sidelined.

Geopolitics are “on watch” with the recent in Yemen, but those headlines are not making financial publications.

More in focus is earnings, with TSLA, GOOGL & TXN reporting on 7/23, chip-play VRT on 7/24AM and more following over coming days (for full earnings see the “Earnings Chart” on the home dashboard). If this leading semi-sector earnings hurt the AI narrative, then the heavily concentrated megacap tech/semi sector could really drag on the major indexes (see this recent note).

Therefore, we are looking for an oversold bounce in equities today/tomorrow, with a move back toward 5,550-5,600 in SPX and 480 in QQQ’s. We’ll then be looking to see how the post-OPEX options positioning shakes out, along with earnings updates, to plot a path forward. Our hunch is that the equity rally is not yet over, and some relief may extend into the 7/31 FOMC. We also note that “the king” NVDA is not reporting earnings until 8/28.

We wanted to finish on the topic of implied vol, with the VIX coming off of multi-month highs near 17. This morning we see SPX term structure at 90-day highs (green line), and still near Friday’s closing levels.

The consensus seems to be that Biden dropping out should raise volatility, but in the short term, we disagree. As such we are looking for SPX IV/VIX to come down over the next week, as focus shifts to 7/31 FOMC.