Macro Theme:

 

 

Founder’s Note:

Futures are flat this AM, after a wild ride yesterday which showed just how unstable the 5,400-5,500 SPX range was (and it remains so). Yesterday’s initial move was a big -1.6% drop, which gave way to a giant 2.7% rally. That rally pushed the SPX back into our > 5,520 “risk on” level. With that we are “sheepishly” long, but will quickly take stops on these positions if the SPX moves back <5,500.

Yesterday’s intraday range was rather unprecedented, and the largest since 8/1/24 (2.8%). Prior to the 8/1 you had to go back to December of 2022 to find a larger intraday swing (3%).

We now read the 5,550 area as a large positive gamma region, which should reduce price action (i.e. volatility) and offer some stability. To this point, we see initial resistance at 5,550, 5,560, 5,600. Support is at 5,510 & 5,500.

<5,500 we enter back into an unstable negative gamma zone, which opens the door to a quick move back down to 5,400. Accordingly, as noted above, we flip back to “risk off” <5,500.

You can see the large, prominent SPX strikes at 5,500 & 5,550 listed below. <5,500 the size of positions shrinks, with put positions (blue bars) being generally larger. From a high level perspective, larger relative puts is a conducive to higher volatility.

What saved equities yesterday was the NVDA CEO commenting on high demand at a GS conference. That comment, right at AM lows, sparked massive call buying in NVDA (orange line), which in turn ignited major indexes higher. In our view, the rally was so violent due to two things:

1) the negative gamma in 5,400-5,500, which likely pushed dealers to sell stocks on the way down, and buy stocks on the way up

2) massive amounts of NVDA options volume, particularly 0DTE/next expiration flow, which levered the entire equity complex higher

NVDA yesterday traded an amazing 6.2 million contracts (11th largest volume since Jan ’20). In total, we mark only 30% of that as tied to Friday’s expiration, but the flow that was tied to Friday 9/13 expiration was extremely concentrated. You can see this below wherein we plotted the top ~50 contracts by volume. There were 11 different 9/13 exp contracts with 6-figure volumes, and only 3 of those were puts. Thats pretty amazing.

This signals to us that what happened yesterday was short dated NVDA players jamming the stock off of those bullish comments, which in turn forced a giant momentum trade, pushing SPX/NDX/semis higher (as NVDA is 7% of those indexes). As we noted above, this NVDA spark came at a time when index flow was very jumpy due to negative gamma dynamics. Said another way, NVDA 0DTE saved the day.

These 0DTE flows are great when they are adding bullish flows, but our concern is that they evaporate in risk-off scenarios. This leaves us with a feeling that yesterday was a symptom of an unhealthy market, wherein liquidity remains poor. This exacerbated the rally. So while we technically flip to a “risk on” stance due to the SPX close >5,520, we are weary of large volatility that is lurking beneath the surface, as traders wrestle with shifting macro flows (i.e. upcoming rate increases) & elections.