Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are off 40bps with anxiety around an Israel/Iran conflict.

Jobless claims are at 8:30 AM ET & there is a 10-year note auction at 2PM.

The S&P seemed ready to shift toward the 6,100 Call Wall yesterday before things fell apart in the afternoon. Now the SPX is back wrestling with the key 6,000 level – and we think if 5,975 goes then we will see a quick test of 5,900.

If jobless claims are calm, that may release a bit of event vol which initially reinforces a 6k pin. 0DTE traders likely step out to sell today’s vol, too – which again helps pin 6k.

Bigger picture on upside: we think yesterday afternoons afternoon selling on the middle east anxieties likely zap the rally that was forming post-CPI – as our “best case” upside is with the 6k pin extending into next weeks FOMC/OPEX. Obviously positive headlines with respect to signed trade deals and/or conflict resolution can help float SPX a bit higher – but FOMC watch for next may hold big inflows from unlocking.

Shown below if 1-month SPX skew from last Friday (gray) vs this AM (teal). Last Friday was when the SPX re-gained the 6k level, and VIX hit fresh lows in the 16’s. As you can see, the call wing is essentially unchanged from Friday’s levels, but the put skew has gained some premium, suggesting there is some renewed hedging demand as equities sniff all time highs (and vol back to YTD lows). Its notable that this vol increase was in the face of a quiet CPI, and politicians headline-pumping positive trade developments (the vol-squash bullets may have now been used up). Further, if the Iran rumors don’t settle by tomorrow we think its unlikely anyone wants to be short vol into this weekend, which removes an equity ballast (vanna).

If 5,975 is lost then we likely see this put wing jump another tranche higher, with VIX moving to 20.

While the equity dynamic is a bit murky, we are seeing some real vol divergences across assets – this is a correlation spike. In the bottom left of the Compass we see all equity ETF’s hiding (green box) which shows us that puts are now bid vs calls – this is in line with the skew lift in SPX, above. Should conflict arise (we hope not), then that cluster of stocks will shift higher on the grid as IV’s likely increase. You can hedge/play this via long put spreads.

In the center we have bond ETF’s (red) – one could argue that its a safety trade/hedge (TLT) – but with LQD and HYG there it seems more of a rate trade. So this is likely more about rate pause/cut expectations improving after the in-line CPI.

Lastly is arguably the safety/inflation/anti-tariff(?) trade in GLD/SLV/BTC (blue box). We’ve admittedly been looking to hold long calls/call spreads in IBIT & SLV, which have been stalled at fresh highs. GLD is now joining the “call bid” party, which relatively average IV’s. We’re sort of looking at these products as this close to a fresh breakout, and so we continue to hold small risk, but high reward call spreads. The idea is that these elevated call skews seem poised to sync with an implied vol surge, moving the blue box to the top of the Compass map (i.e. high IV).

Finally is USO call IV (red arrow), which is quite bid due to conflict headlines. Crude did fade a bid overnight, but we will be on watch for the opportunity to sell call spreads if that IV shifts higher (NOT naked short).