Macro Theme:

 

 

Founder’s Note:

Key SG levels for the SPX are:

• Support: 5,100, 5,000
• Resistance: 5,200, 5,220, 5,250, 5,300, 5,315

For QQQ:

• Support: 430
• Resistance: 440, 445

IWM:

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

5,315 remains our key upside level. A close above that level signals a “risk on” move ahead, which could trigger a move to 5,400.

5,000 remains our key, long term support line. Dealers hold a mild negative gamma position from <5,300 down into 5,000, which should keep volatility elevated in this zone.

Equity futures are opening 40 bps lower for ES & 110 bps lower for NQ. We are therefore eyeing 5,100 support for the SPX & 430 for the QQQ (~17,500 NQ).

Once again equities received the “rug pull” after SPX rejected our key “risk on” level of 5,315 in the AM.

We’ve said this several times before: market moves in these negative gamma regimes are unstable and subject to quick reversion. Price will continue to be unstable until SPX recaptures 5,315, which is great for day traders but less desirable for those with >1 day views.

While the SPX did technically break 5,315 for about 15 minutes in the early AM, the options flows clearly flipped very negative when that level was hit (

HIRO

chart below, yellow line). You could see this negative flow both in the SPX Index, but also with single stock flows, as shown here (S&P equities signal, purple line). Had

HIRO

flows been positive (i.e. calls bought, puts sold) at 5,315, we think the SPX would have held.

One of the more interesting aspects of this vol spike, was the cadre of traders seeking to play the “free money” trade of volatility mean reversion. While that has tactically worked for some (i.e. jumping in & out), we’ve been on the view that vol will be sticky for some time. With a small trigger, the more traders that pile into a short may add to risk of volatility jumping.

Shown here is SPX fixed strike vol for today, compared to Friday’s close. What you can see is that vol is mildly higher across the board, which syncs with VIX now higher vs Friday’s close (28.3 now vs 24).

If we compare this AM vs Monday’s close, we see that vols are relatively lower across the board. The takeaway here is that if you were skilled enough to sell the wacky Monday AM volatility highs, the easy money has been made. The overall trend of higher volatility, it seems, does appear to be sticky. Further, we have all these upcoming data prints which is going to likely keep vol elevated (see the top of our Note). If we do indeed get a final flush to 5,000, its likely that implied volatility jumps in kind.

For longer term traders (i.e. out past a few days), an implied volatility release is a critical signal of “risk on”, and, in the short term, we think its unlikely to manifest until 5,315 is materially broken. The other area we will be looking to establish long positions is into a move to 5,000, because we believe it is material, long term support.