Macro Theme:

 

Short Term Resistance: 4,550

Short Term Support: 4,450

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

Major Range High/Resistance: 4,600 – 4,615 (SPY 460/SPX 4,600 Call Wall(s))

Major Range Low/Support: 4,400

‣ Thursday 8/10 CPI may spark a directional trend from 4,500 into August 18th OPEX*

‣ The bullish case remains intact with SPX >=4,500 and we hold a current upside target of major 4,600 resistance*

‣ Current positioning suggests 4,400 would be a major low*

*updated 8/8

 

Founder’s Note:

Futures are marginally higher to 4,508 ahead of this mornings CPI. Levels for today look very much like yesterday: support shows at bands below: 4,481, 4,472, 4,459 & 4,450. Resistance above is at 4,500-4,510 (SPY 450), 4,526 & 4,550. The clustering of these levels is significant, as it implies smaller trading ranges which translates to subdued volatility. Accordingly, our 1 day range estimate is 75bps, which is the max open-close range on the day.

The QQQ

Put Wall

has dropped to 365 from 375. 365 is now the low end of our range. Resistance above is at 375.

 

In regards to CPI, the 0DTE straddle (ref 4495) is trading at $37, or 80bps, which falls in line with our 1 day estimated move (75bps).

Today’s IV’s are indeed elevated as shown below. We’ve plotted this out vs July’s CPI, and you can see that the term structure is elevated out in time. However, recall that those July IV’s were at/near multi-year lows. The point here is that while there is a lot of chatter about this number, its not really being priced like a major event (compared to late ’22 CPI’s). Our baseline assumption here is that the print comes off “in line” which leads to short term contraction in IV, which may provide a tailwind for equities.

There is a bit of tension in the air, as the SPX has slid down from the 7/27 highs near 4,600. Implied volatility has indeed perked up, but again this was from a baseline of multi-year lows and a market that was very call heavy. To this point, it was rather fascinating to read our note from 1 month ago, heading into July’s CPI print. Interestingly the S&P is unchanged from that July 12th CPI report, wherein our focus was on the chase in call options:

“We’re also now seeing a full reversion in skew, as shown below. Recall that June was characterized by this “frothy upside”, and those elevated call IV’s have reverted with the S&P just ~1% off those June highs. While calls have cooled off, Goldman notes “1-month put-call skew for the average S&P stock is also low right now (5th-%ile over past 1yr), indicating investors are generally well positioned for upside asymmetry.”

–SpotGamma Founder’s Note 7/11/23

One could look at this as July having clear, extreme bullishness in options demand/positioning, which has mean reverted. You can see this displayed in realized volatility, which is plotted below. The 5 day RV (red) has perked up to 11%, which equates to daily SPX moves of ~70bps as the SPX has declined ~2.5% over the last 10 days. From this perspective, we view this recent move (both in vol & price ) as a correction from stretched upside sentiment.

Adding to this (and as recently discussed), we do not see anything in positioning that signals extreme volatility is imminent. Positions below remain sizeable and balanced, as shown in the plot below (calls = orange, puts = blue). Its certainly possible that markets continue to grind lower, but we suspect that would look a lot like the last week as opposed to a violent, sharp drop. Fruther, we suspect that there is a large contingent of short volatility traders waiting to take a swing at a relative pop in IV’s.

You can see the balance of positioning shift to puts <4,400, and a break of that level would place us into a crash zone.