Informe SG Levels

There was a relative active futures market overnight, putting in a low of 4655 before recovering to 4680. The S&P starts the day with a modestly positive gamma position which translates to an expected max 1-day move of 0.6%. We’d note that the SPY and QQQ are both holding a negative gamma position which implies higher volatility. For today we see resistance at 4700, with critical support at 4670. Our models show gamma flips at 4670, which means dealers may start shorting futures on a break of that level.

Our primary focus today is on implied volatility[IV]. Yesterday we pointed out that at-the-money SPX IV was quite low, particularly when contrasted vs the VIX complex. That short dated SPX IV is back up toward 15% today, with the VIX currently at 19.5 (above yesterdays close). Our Risk Reversal metric shows traders are now starting to price puts a bit more favorably to calls, too. However, while puts were priced higher it doesn’t appear that there was any material demand to buy those puts. We make this determination off of the fact that neither the Put Wall (4400) nor the Vol Trigger (4670) moved overnight. The addition of short dated puts would have most certainly shifted one of those metrics with a nominal amount of new puts.

The point here is that despite the elevated volatility, there was no “fear trade”. Regardless, this higher IV has primed the pump for market movement. It’s worth highlighting the vanna setup shown below, which reveals a neutral vanna setup in SPX, but a sharp tilt to QQQ. This indicates the tech complex is poised for more IV-induced movement (dealers shorting on declines, buying on rallies). The implication of this is we expect much more QQQ movement relative to SPX.

The bottom line is this: For markets to regain a bullish stance, we’d look for a close over the 4700 large gamma strike. A break of 4670 may initiate a spike in volatility and a quick move down to the 4730 area. Watching IV (i.e. VIX) is critical, as if IV breaks lower[higher] then markets should move higher[lower].

Model Overview:

4670 critical support, 4750 upside target into Dec OPEX.