Macro Theme:

 

 

Founder’s Note:

NOTE: We’ve rolled our futures data & levels to the Dec contract.

Futures are again higher, with the SPX pushing up against the 5,600 zone. As you can see below, that zone is in positive gamma territory, and that positive gamma increases should the SPX go higher. This implies the market is more supported into higher S&P prices, as positive gamma contracts volatility (i.e. we are looking for sub 1% moves today).

With that, resistance should pick up into 5,600, with support at 5,550.

In yesterday’s AM note we discussed the view that NVDA had kick-saved equity markets, as positive comments from the NVDA CEO sparked heavy short dated call buying.

Mirroring those view (in a much more eloquent fashion), was Nomura’s Charlie McElligott, who put out a great piece yesterday about the “NVDA Industrial Complex”. The idea starts with the direct Index impacts of NVDA moving higher, which is a theme we discuss often.

For example, on 9/11, NVDA alone was responsible for 44% of the SPX rally, and 27% of the QQQ rally. We’ve described this as “reflexivity”, wherein (for example) NVDA moving up forces SPX indexers to buy NVDA (NVDA is ~7% of the SPX index). That Index buying in turn drags NVDA higher because NVDA is so heavily linked to the SPX.

What is a bit tougher to calculate are the “derivative effects” of NVDA’s moves due to its concentrated size in “first order” ETF’s like SMH & XLK, but also leveraged ETF’s. Below is a sample of those knock-on NVDA effects, with +$8bn having to be bought in leveraged ETF’s alone on 9/11 – a lot of which is triggered by NVDA’s +8% rally. Rather than framing this as “reflexive buying” or “derivative effects”, Nomura refers to it as “synthetic negative gamma”…a term we’ll have to borrow.

Zooming out, the more macro impact of this is that correlation is once again plummeting as seen in COR1M below. We had indeed marked this flow as dead, but the NVDA comments have super-sparked a return back to the AI/chip theme. The effects of this is a decline in correlation as the AI related stocks rip, and other sectors & themes die off. One type of way to trade correlation involves essentially getting long (directionally and or vol) the tech leaders and selling the SPX/Index (directionally and/or vol) – the result being a long vol drive (ex: buying calls) in the winners and a short vol (ex: sell calls) blanketing the SPX.

More simply, this decline in correlation means that if you don’t own NVDA (green, below) & or related chips you are being penalized. Consider the positive performance of SPX (purple) and QQQ (pink) over the last 5 days vs negative performance of IWM (blue). SPX/QQQ are semi/AI proxies due to +25% of their components being AI related, while IWM (which was supposed to rip due to rate cuts), is floundering.