Macro Theme:

 

 

Founder’s Note:

Key SG levels for the SPX are:

• Support: 5,200, 5,100, 5,000
• Resistance: 5,250, 5,277, 5,300, 5,315, 5,350

For QQQ:

• Support: 440

  Put Wall

• Resistance: 445, 450, 460

IWM:

• Support: 200, 190
• Resistance: 210, 216

US equity futures are (again) +1% & with Japan (again) ripping higher after an apparent BOJ pivot.

The issue here for equities is that yesterday’s full day of gains were all given back over the course of an hour into the close. Further, the market rejected right under our “risk-on” level of 5,315. This highlights why we thought (and still think) the recapture of 5,315 is critical – because its above that level wherein dealer hedging flow should help to absorb selling, rather than fuel selling.

On this point, we saw a lot of talk yesterday that there was “positive gamma” and “market support” above 5,200 and into 5,250, but that, in our opinion, was (and is) wrong – and yesterday’s market action supports our view.

Shown below is output from our new SPX gamma model (still in beta), which we show today to carefully illustrate the importance of 5,315.

Under 5,315 you can see the gamma curve (black) declines <0, which informs us that SPX is in a negative gamma position <5,300. This means that when the SPX yesterday opened at 5,200, and started moving higher, hedging flow was chasing the market to the upside, which exacerbates upside volatility. Then, when sellers entered, hedging flow chased the market back down – exacerbating downside volatility.

These wide swings can be wonderful if you are day trading, but may be gut wrenching if you have a longer term view. Under 5,315 the same negative gamma dynamic is in place for today. Further, we see no reason for price to stabilize <5,300 until 5,000. At 5,000 we would likely be looking to “buy the dip” with a longer term upside view.

To the upside, over 5,315 you can clearly see the gamma curve is materially positive, which infers dealers should be selling into rallies, and buying dips. This offers more price stability.

That price stability should allow realized volatility to decline (1-month realized is 20%), which should drag down implied volatility. We see an SPX move >5,315 as more of a green light for various flavors of vol selling, and also a place where vanna can help to fuel rallies higher. Therefore, >5,315 we likely get that positive equity gamma support, in the context of a vanna “boost”, which means equities should slide up (vs negative gamma “blast”) toward 5,400.

In regards to the volatility space, at-the-money IV’s are now ~25% vs ~15% just last week. With some SPX price stability we could see very short term implied vols slump lower (<=Exps 8/22/24), but we suspect longer dated options are going to hold elevated vols due to geopolitics, elections and incoming macro data (i.e. Jackson Hole, NVDA ER, Sep FOMC, etc). Further, it also takes some time for the elevated realized vol we’ve experienced to roll out of backward-looking risk calculations (i.e. many forecast future volatility based on recent volatility).

This signals to us that if the SPX reaches 5,400, upside may then stall out as the vanna-related fuel sputters into 8/22 Jackson Hole. What happens following JHOLE/NVDA is TBD.