Macro Theme:

 

Short Term Resistance: 4,523

Short Term Support: 4,515 (SPY 440) – 4,500

Risk Pivot Level: 4,500

Major Range High/Resistance: 4,541

Major Range Low/Support: 4,300

‣ We look for low volatility on Monday, 7/17 & Tuesday 7/18 which supports the 4,500 level

‣ A window of weakness may open with 7/19 VIX expiration, in through the following week which may result in a break <4,500

 

Founder’s Note:

Futures are flat to Friday’s close, at 4,537. For today we mark resistance at 4,523 & 4,541. Our key support/”fair value” area is 4,515-4,500. Support below that key range is 4,483. We continue to look for volatility to remain in line with that of the last several sessions, with a max high/low range of 80bps on the day.

The SPX

Call Wall

did roll higher to 4,600, however it remains at 450 for SPY. This implies that our overbought condition has now shifted to neutral, with 4,500-4,515 being a large pinning area into this weeks expiration. The shift of the Wall to 4,600 is the result of large puts being added to the 4,500 level, which shifts this strike from a resistance area to a “neutral” strike as large hedging flows should center around this 4,500 level.

We estimate that 4,500 should remain a pinning zone until Wednesday AM’s VIX expiration, wherein the OPEX pin may begin to break down.

Through our lens, there are two forces helping to support equities.

1) There is a large amount of positive gamma linked to the 4,500 range in the S&P, as outline above.

2) We believe there are VIX flows that serve to pin down volatility, which will likely be removed on Wednesday. As shown below, nearly all of the VIX exp call open interest resides >=14 in the VIX, and we believe related hedging flows serve to hold volatility down.

An additional flow that has the potential to spark some volatility is the unwind of hedges related to large single stock equity call positions. Plotted below is the call (purple) and put (teal) delta notional by expiration for US single stocks. This is currently larger than June OPEX, which was a large quarterly expiration. Our data shows that, since Jan ’20, 65% of the time the S&P500 mean reverts after expiration – meaning that if there is strength/weakness into OPEX, the weak after is usually down/up.

Given the positioning outlined above, we present the following outlook:

• We look for relative calm in markets today (Monday, 7/17) & Tuesday, with a window of weakness opening from Wednesday (7/19) VIX Expiration through next week.
• Our view is to look for selling into equity strength, and/or for traders to overwrite single stock positions.
• Long near-the-money put positions may make sense as they may benefit from equity mean reversion (i.e. delta) and a corresponding increase in volatility.

Our base case here is for some equity consolidation. This is not a call for a significant decline in equities, as that would likely require some external catalyst.