Macro Theme:

 

 

Founder’s Note:

Key SG levels for the SPX are:

• Support: 5,416, 5,400, 5,373, 5,350, 5,300
• Resistance: 5,500, 5,520, 5,550
• 1 Day Implied Range: 0.63%

For QQQ:

• Support: 460
• Resistance: 464, 470, 475

IWM:

• Support: 210
• Resistance: 220

8:30 AM GDP

TLDR: Per yesterday’s note, since we are “risk off” <5,500, the S&P is now solidly in negative gamma territory, which implies elevated levels of volatility will persist unless 5,500 is recaptured. Therefore, when the SPX is >Vol Trigger (currently 5,510) we flip back to “risk on”, and would look for volatility to contract. While <5,500 equity bounces can be violent, but unstable, and subject to quick reverses – so trade accordingly.

Below 5,500, our updated models show negative gamma increasing down to 5,000, which implies elevated risk remains down into that level. Interim support levels show at 5,400

Put Wall,

5,373, & 5,350.

As everyone is aware, yesterday was the weakest equity session since 2022, with the -2.3% SPX move breaking a streak of 356 days without a 2% drawdown.

From our perspective, we indeed yesterday gave edge to support holding at 5,500, but cautioned: “If 5,500 SPX breaks, it is a “risk off” signal, and we would look for a relatively fast move to 5,400.”

This downside caution was driven by the onset of negative dealer gamma present <5,500, which would drive downside volatility.

That being said, we do not think yesterday was exacerbated by fresh options flow. In fact, we struggle to see any

HIRO

delta readings that set fresh 30 day lows which signals a lack of put demand.

Consider the S&P500 complex below, which showed a total negative delta signal of just -$239mm, vs a 30 day low of $-6.9bn. Further, the most negative aspect of yesterday’s flow was 0DTE (teal), which was a fairly heavy -$3bn. Benign readings were additionally seen nearly across the board, in Nasdaq, Mag 7, etc.

One would expect to see much larger negative delta readings given the magnitude of yesterday’s selling. The point here is that the trigger for yesterday’s selling wasn’t from new option market flows. However, we believe that <5,500 negative gamma helped speed up downside.

So, what was the catalyst?

Some traders were offering the Yen (blue) move as a carry-trade catalyst, and while that is outside of our purview, the correlation is interesting. We’ve got nothing else to offer on this topic, but want to be mindful of further volatility in FX.

Second, and back to our wheelhouse, we wanted to bring attention back to the ideas of correlation, and volatility.

Recently, we’ve been focused on the idea of “Correlation Spasms“, and the incredible number of things that haven’t been seen in years: lows in realized vol, record streaks without 2% moves, record low correlation, record high concentration, etc (all covered here).

We surmised that the way these abnormal readings all normalized was through a sharp equity drawdown, which would spike volatility and snap correlation higher. This in turn would lead to reduced index concentration (i.e. better breadth).

As you can clearly see, yesterday triggered a major move higher in the CBOE COR1M correlation reading (blue), and corresponding jump in volatility (VIX, orange) as equities were down across the board.

SG Members are also aware that the beta of the VIX to SPX was in the 0th percentile heading into last week. That means the link between SPX moves, and VIX, was broken.

The blue marks below show the “flat” relationship between SPX/VIX readings for all of ’24, prior to yesterday. Yesterday’s reading is marked in red, and you can see we had a much more “normal” VIX:SPX move.

This vol move does reflect traders looking to get long volatility (and/or cover short vol), and on this point you can see 1-month skew (teal line) rose dramatically from Tuesdays close (gray line).

We are looking for signs that demand for long put positions persist today into tomorrow as a signal that traders are bracing for “unknowns” ahead. Recall that traders can hedge “knowns” like a PPE or FOMC event with 0DTE options, but “known unknown” risks require longer dated hedges. And so if we see longer dated put demand persist, well know that smart money is concerned out in time.

Moving on to another key driver of yesterday’s move, in our “Correlation Spasm” content our catalysts for an unwind of record-low correlation/vol were: rates, geopolitics, or earnings.

While the trigger for yesterday’s selling isn’t totally clear, we did see poor earnings from megacap components GOOGL & TSLA, which themselves offer a lot of SPX/NDX pressure. We also note heavy weakness in the semis (SMH, yellow).

Megcap + semis are an extremely large weighting of the SPX (blue) & QQQ (teal), and so their outsized weakness yesterday asymmetrically punished those cap-weighting indexes. In comparison, the equal-weight S&P500 ETF (RSP, orange), was only -1%.

Saying this another way: those stocks that drove positive performance (creating bizarre equity relationships) over the last year are also now leading the decline (and unwinding bizarre equity relationships).

There are plenty of catalysts over the next several days with GDP today, PCE tomorrow and then FOMC next week, along with more mega-cap earnings on 7/30. Decent data, and a dovish Fed could easily turn the ship around. However, we have to remember that just a few weeks ago the cool CPI and assumed Sep rate cut triggered a stampede into small cap stocks. That rally in small caps came against negative tech returns, and was a signal of “correlation spasm”. We have to be on watch that the next equity bounce may again favor small caps over tech after FOMC.

Making things tricky, should be get decent reading out of megacap and semis, that could re-invigorate the “correlation trade” that has dominated up to this point. Obviously the harbinger of this is NVDA, which doesn’t report until the end of August.