• Macro Theme:

 

 

Short Term Resistance: 4,400

Short Term Support: 4,240

Risk Pivot Level: 4,325

Major Range High/Resistance: 4,400

Major Range Low/Support: 4,200

‣ We target a market move <4,300 by 9/29, and would be stopped out on this view with a close >4,325.*

‣ If the SPX is <4,300 into 9/29 exp, it may mark a major short term low, as put positioning hits extreme highs.*

*updated 9/27

 

 

Founder’s Note:

ES futures are up 30bps to 4,328. SPX support levels are: 4,265, 4,250, 4,239, 4227, 4,215 & 4,200*. Resistance above is at 4,274, 4,300 & 4,316. The 1 Day Implied Move is 0.81%.

The

Put Walls

have rolled lower in SPX to 4,200, and 425 in SPY (SPX 4,240). This “validates” the lower SPX prices.

 

*Note these levels are based on the size of options positions, and their “stacked” nature below (i.e. every ~10 handles) reads to us a signal of support & downside being more of a “grind” vs high volatility selling.

For QQQ the 350

Put Wall

remains major support, with resistance above at 355 & 360.

 

TLDR: We expect another day of contained volatility. A close >4,300 today would, in our view, sharply reduce odds of a 4,200 test by Friday. It would like require a tail print out of Thursdays GDP or Friday’s PCE to spark a test of 4,200 by Friday. We are still on watch for a rally out of Friday and into early next week.

Yesterday was a very interesting session as the SPX broke below its

Put Wall.

Despite this break, and the VIX hitting and intraday high of 19.5, volatility was contained. Consider our SG Implied Move for yesterday was 0.86%, and the major noted support level <4,300 was 4,277. As you can see below the SPX closed just a shade below that major 4,277 support level, and right on the lower bound of the Implied Move. While this might come off as self-aggrandizing, our purpose in noting this is that the market had every reason to break materially lower (ex: new highs in yields, gov shutdown, etc), but the move remained in line with SG models. This selling remains a grind, not a panic.

 

Expectations are one key driver of market behavior, and positioning is another.

In regards to expectations, one could argue the Fed reset expectations, extending the timeframe of “higher for longer” & fresh highs in yields likely makes owning equities less attractive. Therefore equities may be in liquidation mode.

This has two implications: 1) large stock holders likely do not want to “fire sale” & cause major market impact 2) you likely don’t buy a lot of puts against stock you’re looking to sell.

There is no surprise here, and that may be zapping demand for put protection.

When we turn to positioning, dealers appear to be in a good spot to provide liquidity, which keeps volatility relatively low. This can be seen in the much-discussed gamma curve, below. As we note, this curve assumes all puts are sold to dealers. Given this maximum possible exposure (i.e. 100% of puts sold), we see that the curve turns higher as the SPX moves <4,200 (see our explainer about why we like this model at the bottom of our 9/19 note). This implies that dealers delta exposure gets less negative with lower SPX prices, and that in turn suggests that dealers are no longer hedging negative gamma.

The takeaway from this is that downside volatility should remain contained while we’re at the trough in the curve, but there could be some sharp short-covering rallies. We’d also note that in truth dealers are not short 100% of puts, and so the “elbow” of this curve likely occurs at a higher strike (we’re probably mid-trough). To change this curve, put positions have to be added or removed which likely does not occur until Friday.

As per yesterday’s note, there are two triggers to spark a possible short-cover, and break the negative feedback loop equities have been under. First, would be a recovery of SPX >4,350, which seems unlikely this week. Second would be the removal of put positions which is going to occur on Friday.

Shown below is

call delta

(orange) vs

put delta

(blue) across the major Indicies, and as you can see this Friday’s expiration is almost entirely

put delta

. While this is not a massive expiration (i.e. its smaller than Oct OPEX), we’d argue that when you combine this “pure

put delta

” with the elevated VIX (i.e. vol premium) it could be fuel for a sharp, short term bounce into next week up toward 4,400.

 

The delta above is only about 10% of total Index + Index linked ETF delta, and so it will not relieve a large amount of pressure longer term. This is why we emphasize that a bounce may be short term in nature. Further, SPX 4,200 will still be very large levels into October OPEX – as will 420 SPX and 350 QQQ.

Finally, we’ve been getting a lot of questions on the

Put Wall,

and stats around what happens when this level is breached. Here is the data going back to 2018 – and so this includes some massive events like the “Covid Crash”. From a top level perspective, we visit the Put Wall in high volatility regimes which creates a wide distrubition of forward returns. There is a tilt toward positive forward returns in this data – but also note some nasty left tails. This suggests that it may make sense to start looking for some positive delta structures – but its imperative to use defined risk structures.