Macro Theme:

 

Short Term Resistance: 4,450 – 4,465 (SPY 445 Call Wall)

Short Term Support: 4,415 (SPY 440) – 4,400

Risk Pivot Level: 4,400

Major Range High/Resistance: 4,500 Call Wall

Major Range Low/Support: 4,200 Put Wall

‣ We maintain a bullish stance while the SPX is >4,400 and below the 4,500 Call Wall (updated: 7/3/23)

‣ We anticipate declining market volatility into 7/21 July OPEX (updated: 7/3/23)

‣ A downside break of 4,400 is our “risk off” signal (updated: 7/3/23)

 

Founder’s Note:

ES futures are off 8 to 4425. Key SpotGamma levels are largely unchanged, with resistance at 4,400 – 4,415 (SPY 440). Resistance above that level shows at 4,450. Support below is at 4,373, 4,365 (SPY 435) & 4,350. Our max trading range on the day (SG impl. move) remains tight at 0.82% (cash open to close).

In QQQ resistance above is at 368 then 370. Support is at 365 followed by 360.

There are a slew of Fed speakers today: Barr 10AM EST, Daly/Mester 11AM & Boster 12PM.

We continue to look for low volatility via mean reversion into the key gamma zone of 4,400 – 4,450. As we march towards next weeks expiration, the gamma around 4,400-4,415 should increase, which should create a larger pull/magnet for S&P500 prices. This 4,400 “pull” was a feature of last weeks trading action, as shown below.

As has been noted in the “Macro Theme” at the top of this note, our model is “risk off” with a move below 4,400. Should the SPX break the 4,373

Zero Gamma

level, we anticipate a test of 4,350.

That being said, there is a fair amount of balanced gamma (large puts & calls) at 4,350 & 4,300 which should function as support if markets slide lower. For today this means we’d look for constructive bounces at 4,350, with 4,400

pivot

ing to major resistance (vs major support). Adding to this, we feel short dated traders are still looking to sell spikes in volatility, which adds to equity support.

As with most market models, the two key elements boil down to time and price. From a risk perspective that suggests:

• Time: We believe these gamma bars & their volatility suppression remain strong into 7/19 VIX expiration, wherein we begin to discount these gamma effects due to expiration (both VIX exp and 7/21 OPEX). This is the “window of weakness”.
• Price: The second scenario which breaks the gamma induced volatility suppression is in a break of 4,300. Below there is where we’d anticipate a large volatility spike and a rather quick test of 4,200 as gamma moves materially negative.

The intraday swings do feel like they are getting larger, but we are seeing little signs of large demand for downside hedges. Further, despite the vol pop on Thursday, the QQQ put open interest did not materially increase – and the same is true in the S&P. Through this we’d frame recent equity weakness as driven by equity trading/rebalancing – not options traders.

Additionally if you look at implied volatility, there is little going on. Below is the VOLI index, which measures 30 day ATM SPY IV. As you can see there was an initial reaction to the jobs data on Thursday, but that quickly reverted (black box). As noted many times, we think this volatility reversion is in driven by the large positive gamma. Through this lens, volatility mean reversion may continue to be at play for another week.

If large downside demand increases it can change the gamma dynamics – but there are no signs yet of material hedging demand. For these reasons we continue to look for mean reverting price action in equity markets, which translates to small close/close market changes.