Informe SG Levels

Futures have surged higher to 4575, sparked by positive earnings sentiment. Gamma has now flipped positive, and with that we see a sharp reduction in our volatility forecast to 0.71% (max move open/close). Resistance is at 4600, with support at 4550 and 4520.

Our models have now transitioned from suggesting that dealers are inducing volatility, to reducing volatility. This is shown particularly well in the vanna model, where in there is a tilt or right skew to yesterdays chart (and all charts for the past few weeks) vs a very flat model output today. If the market continues to run higher into 4600 the vanna model will start to skew towards the left (or the mirror image of yesterday) which infers dealers will “impactfully” sell into rallies.

The point here is that it seems the fast gains have been made, and we should transition now into a lower volatility environment. Implied volatility remains elevated over pre-OPEX levels, and so there is still a vanna-tailwind for equities.

Its also clear that there was a pickup in call activity for SPX/SPY in and around 4600/460. We’ve not seen much in the way of puts closing – however based on the decline in implied volatility (i.e. VIX) we can assume the vanna trade added a large boost.

We now see the near term downside risk as materially reduced, and it would only be on a break of 4500 that our models would forecast a significant shift higher in volatility.

While we do not anticipate a major decline in the near term, we do note that over the long term the put protection has now been reduced, and therefore a second leg down would potentially probe deeper than late Jan.