Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are off 20bps with CPI at 8:30 AM ET.

TLDR: It’s sketchy out there. A break <6,800 implies we visit the 6,600s as downside put positions drive short hedging. Low CPI may kick-save things, with a positive market response having a clear path back to 6,900. Ultimately we think upside is only worth a day trade at this point, as rallies likely remain unstable. If the SPX gets into the 6,600s it’s likely vol premium gets rich enough for vol sellers to step up, which could offer support.

Gamma is negative both above and below current SPX prices (6,815), save for one mildly large 0DTE strike at 6,750. That strike is not big enough to hold up the market, should the SPX break 6,800. We think that if that level breaks, then a visit to the 6,600s is on tap. We had been of the view that next weeks OPEX would loosen up the downside, but once the Risk Pivot/ Vol Trigger (6,900) were broken it rendered that view moot.

To the upside, it’s clear sailing into 6,900. This violent mean reversion path is the one the market has taken so many times in recent weeks, and that idea should be respected here.This time does feel different, and if there is a decent bounce here it may lead to a strong OPEX shorting opportunity.

Why different? Because puts are bid, as you can see in the increasing SPX put skew. The put wing is now at the top of its 90-day range which is a sign of market maker downside stress. This is not armageddon, but it is “alert”. Should SPX slide down toward 6,600 we’d think these vols would jump ~5 points, and we’d see the VIX go from ~20 to 30. You may also note that call IVs are relatively quite low.

Placing this in more context, we set Compass set to Put Skew %’ile (Y) vs Call Skew %’ile (X). Put Skew is 70th, while Call Skew is only 7th. Further, IV Rank is only 17. This sums up to put hedges being added, but volatility not yet spiking. That put activity lays the groundwork for a big negative gamma, negative vanna decline. It’s the tinder for a big vol spike.

Seeing both sides, one could say “decent CPI lets traders slam that put wing, which pops stocks”. That’s true, but the only thing bullish for stocks right now are prospects of rate cuts.

There is no equity sector space currently catching a bid. Software, the worst of it, was starting to bounce before U and APP earnings made OpenClaw “real”. The result of this is that correlation is starting to spike, which is an early signal of traders dumping stocks to roll into other assets. COR1M (below), shows that correlation is starting to lift – but like IV/VIX its only “alert” and not yet “freaking out”.

A last point on software stocks – we still think looking at short vol/put skew for names with upcoming earnings, as the +90 IV Ranks in the likes of CRM/INTU (for example) may allow you to sell, say, put flies at +3 months to expiration (or even farther out), and the earnings contraction may still allow short options structures to pay even if the stocks have ~20% further declines.

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