Macro Theme:

Key dates ahead:

Founder’s Note:

Futures have dropped about 60 bps.

GOOGL post ER: -4%

BTC plunging: $69k

AMZN and Blue Owl report tonight, both are important to the software story. MSTR also reports…could be interesting given BTC implies negative NAV.

TLDR: The worry here is that one of these spasms finally catches, and turns into a meaningful decline. Puts are clearly being bought, which adds probability to that sticky decline. <6,900 this is a major concern, and 6,675 is our current max downside target. We remain neutral to short of stocks while SPX is <6,950 Risk Pivot.

7k remains big resistance.

Sentiment has certainly shifted, with many bank notes focusing on “quakes” and the like. The reality is, as discussed yesterday, correlations have started to re-normalize but are far from normal. We also see that the daily 0DTE positive gamma supply is pretty much absent while SPX is <6,950. The risk here is that one of these spasms, which have been mean reverting over the past week, suddenly turn into a liquidity cascade. None of this should be new information if you’ve been a SG sub for more than a day.

The current negative gamma dynamic <6,900 suggests downside catches, as implied by the large zones of red on TRACE.

Further we note that vol is now bid, as you can see in the Fixed Strike Matrix. Here we compare fixed strike vol from Monday vs today, with a focus on slightly longer dated OTM puts. As you can see, vols are up, particularly in near term tenors. This syncs with the negative gamma above, telling us that puts are indeed being bought.

The question now becomes: What are people hedging, and what clears that risk? While its been software stocks plunging, metals mean reverting, etc we saw yesterday rate related names like housing up sharply. So that speaks to some equity sector rotation vs asset rotation (out of stocks and into, say, bonds).

Looking at the SPX term structure and forward implied vol, nothing really stands out as a key forward event. Yes short dated vols are a bit elevated, and so are vols for CPI next week – but thats nothing particularly notable. Given this, we still think that what’s happening here is more of a positional normalizing, particularly in the vol space.

Getting to the point, the worst case downside we see is around 6,675 given the negative gamma dynamics. If we see a sharp decline we would start thining about monetizing long puts and/or shorting some put spreads. To the upside, it seems like 7k is going to be formidable resistance into next week – if not Feb OPEX.

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