Macro Theme:

 

Short Term Resistance: 4,565 (SPY 455 Call Wall)

Short Term Support: 4,500

Risk Pivot Level: 4,500 – 4,515 (SPY 450)

Major Range High/Resistance: 4,600

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 at 4,590 ahead of this AM’s VIX expiration, and TSLA/NFLX earnings later tonight. The SPX & SPY

Call Walls

have rolled higher, which places resistance for today at 4,565 (SPY 455 Call Wall). The top end of our range is now at the 4,600 SPX Call Wall, however we do not think that is in play for today. Support below shows at 4,523, then 4,500.

The QQQ

Call Wall

remains at 385, which is our primary resistance point. We mark the QQQ as overbought as it is above its

Call Wall

level. Support below shows at 383, then 380.

Our view has been that the SPX would hold to the 4,500 – 4,515 (SPY 450) level into this week due to the large positive index gamma, and dwindling vanna (i.e. low IV’s). We are looking for reversion into that range.

What we generally anticipate happening in these environments is for the SPX to stick to the

Call Wall

until & unless it rolls to a higher strike – which is a data-backed view. Our data shows that forward 1 day, and 5 day SPX mean returns after a breach of the SPX

Call Wall

are -20bps & -15bps, with mode(s) of 0 & 1%, respectively.

Back to that 4,500-4,515 area, our view was/is that this would be a range which would attract the S&P due to the large positive gamma expiring this week, leading to a pin. We still hold this view, despite yesterdays 85bps (open/close) lurch higher.

Our SPX forecasts are mixing with a bunch of factors that continue to strike us as notable and/or unusual.

First, in regards to today’s VIX expiration, we flagged a few sessions ago that +95% of VIX call open interest expired >= 13.5. This VIX appears to be on path to settle at 13.3 this morning, which renders ~3.6 million calls worthless.

While we can’t provide a hard link between VIX exp & yesterdays movement, its unusual to see the VIX (orange) up yesterday into the SPX rally. Strangely, the VIX “rejected” that 13.5 level just as the SPX hit a big resistance point in the 4,550 area.

On this point, spot up/vol up has been a feature of the market this year, as GS highlights in this chart (h/t ZH). This suggests traders are chasing call options, and is a dynamic we wrote about at the start of this year.

As long call demand increases, negative gamma increases which infers dealers must buy stock into higher markets. The last time this correlation hit these highs was late ’17…which was the lowest VIX reading ever & the previous all time low in the CBOE correlation index (see here).

Relatedly, we see that our SPX risk reversal hit its highest level ever (going back to Q2 of ’20), which suggests that SPX call demand is heavy. However, when we look under the hood what we see is that its not so much an increase in demand/prices for SPX calls as it is an eviceration of put values. Below we’ve plotted the SPX skew for today vs 1 month ago (AI mania, round 1), as well as back in Nov ’21 which was when the SPX hit an all time high.

As you can see the 25 delta call (25DC) IV’s line up, but the 25 delta put (25DP) IV’s are much lower now that vs those other dates. One has to take this as a signal of heavy index put selling.

You do not see this phenomenon on the single stock side, where there are clear call skews which unsurprisingly imply heavy long call demand in single stocks.

Shown below is US

call volume

(green) vs puts (red). As you can see there has been a heavy divergence of late, with

call volume

rivaling records and puts trailing off. The 20 day average of

call volume

does seem to be declining, but

call volume

s have recently rebounded (dashed green line).

Boiling this down to basics you see the selling of S&P vol (puts) and the buying of single stock vol (calls), which links back to yesterdays note about correlation and the like.

So, what is our point?

These flows are all reflexive. They’re in feedback loops which spurs prevailing flows onward. As downside SPX IV’s goes lower, and single stock continue higher (both in price and/or vol) it draws flows that reinforce that price action.

We’ve now hit this point where several things are at “all time” readings – all of which imply an imbalance. The unwind of that imbalance should be volatile, as traders are forced out of the positions which drove the imbalance.

These conditions can persist for some time, and its hard to see a reason the feedback loop should break unless there is an external catalyst. This is a “medium term” dynamic to watch.

In the short term, we circle back to OPEX. Shown below are is the performance of the SPX after each 3rd Friday expiration. Positive gamma expirations are expirations with large call positions. The plot below was a quick back of the envelope depiction, but as you can see, we’ve seen a >=2% drawdown after each of these expirations. July is a large positive gamma expiration.

Negative gamma expirations are framed by large put positions, as in January and March. The SPX rallied >=2% after these expirations.

For these last several months these OPEX driven windows of weakness have been buying points, as we do not see a reason to treat any post-OPEX drawdown differently, unless 4,400 is lost.