Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are +60bps after yesterday’s drubbing, wherein the SPX lost 3%.

Resistance: 6,000, 6,115, 6,050

Support, 5,900, 5,850

We are bullish of SPX while SPX is >5,900, with an upside target of 6,000. There is now plenty of vol to crush, and the failure for equities to follow through on declining overnight may give a window for short volatility traders to come in, which offers positive vanna flows to equities.

The SPX has to recover 6k in equities for the JPM collar to grab hold into 12/31. We are quite concerned a rally today may just be a dead cat bounce.

Starting off we see low stability in TRACE, which backs large trading ranges for today. In addition to the positive prospects of vanna-fuel, there is light positive gamma > 5,800 as traders have sold puts from 5,800-5,900. Additionally, we suspect there are a bunch of Dec long puts that are being monetized today, bringing some positive delta lift.

Yesterday reminded us a great deal of the move into August, wherein a frothy imbalance (TSLA, Mag 7) drove smashed correlation, and low volatility expectations on the index side. When given a negative catalyst that imbalance normalized – and did so with speed. In early August, just as with yesterday, many were left scratching their heads as to how fast and how far things corrected.

Take for example correlation (COR1M, purple), which hit all-time lows in July which corresponded with local VIX lows (bottom chart). When the SPX broke on 8/2 we saw correlation leap as all stocks sold off (not just IWM/RSP/DIA), and implied volatility jumped. In other words: relationships normalized.

We are certainly not here saying that we called for a 3% SPX decline over a 3 hour period. We are saying that the signs on instability were there, and so this move happened within a lot of context.

There is still a massive options expiration tomorrow, and that is likely to be a controlling factor for equity flows into tomorrow. Yesterday, pre-Fed, the call to put imbalance (delta notional) for Dec OPEX was 10:1, well now its just 2:1. This means that there are a lot of puts that were worthless yesterday AM, that are now worth something today, and set to expire tomorrow. This can help to fuel a “dead cat bounce”. If that dead cat gets us over 6k, then the 6,055 JPM collar likely has enough strength to reel equities back in.

We are being careful here to say that this move reminded us of early August, and our spidey-sense is that this may have been more like August 2nd (green), not Monday August 5th (red, VIX >50). This is not to say tomorrow sees the huge spike, but more that yesterday was the trigger for a general expansion in volatility – not a one off blip. Again – if 6k is recovered then we will back off from this view, but until/unless that happens then we are going to stay light on our feet.

This also reminds us of late ’21 when in Dec ’21 the Fed sparked big selling on the spectre of rate increases. The market recovered from this into OPEX and end-of-year, and then came to terms with the uncertainty in early January ’22.