Informe SG Levels

Futures are >10 points higher to 4713. As anticipated there was a large reduction in gamma, however the SG Gamma Index remains strongly positive. We’ve discussed how this gamma reduction should lead to an uptick in volatility for this week, and at the moment this volatility appears to be expressing higher. Our models forecast a moderate 0.55% maximum move for the S&P today. We see resistance at 4735 and 4750 (Call Wall). Support is at 4706 and 4670 (Vol Trigger).

The current distribution of gamma is best shown in the plot below. As you can see, the greatest cluster of positive gamma is in the 4725-4740 area, and if the market can get above that area we see that as a signal of “basing” for a another S&P leg higher. In other words this ~4735 area of gamma would provide support for a “Christmas Rally”, assuming it syncs with the Call Wall rolling higher from 4750 to 4800.

Last week we did give and edge for a downside move into this week. The current options position shows us that the S&P maintains a bullish stance as long as prices are >4700. Beneath 4700 gamma support deteriorates quickly, and beneath 4670 we estimated that dealers shift from light buyers of futures (i.e. hedging positive gamma) to selling futures (i.e. hedging negative gamma).

Finally, we must note implied volatility. Short date at-the-money implied volatility in the SPX starts off low (10%), but we note the VIX is up at 18. This is a holiday-shortened week in the US, which can play with options values but it seems to us that this elevated VIX shows there is a bit of “vanna fuel” which can help push markets (implied volatility decline[increase] fuels higher[lower] market). If a somewhat large move does not happen quickly, we think that any premium to implied volatility (i.e. VIX) gets sold quite quickly – particularly when realized volatility is at a lower bound as shown below.

Model Overview:

Critical Support is at 4670 (Vol Trigger flip point) with major resistance at 4750 (Call Wall). The S&P has a bullish stance as long as the S&P remains above the Vol Trigger level.