Macro Theme:

Short Term SPX Resistance: 4,325

Short Term SPX Support: 4,225

SPX Risk Pivot Level: 4,315

Major SPX Range High/Resistance: 4,400

Major SPX Range Low/Support: 4,200

‣ If the SPX closes <4,300 on Friday 10/20, we look for a short relief rally to start next week.*

‣ Nov 1st FOMC is a major turning point for equities*

*updated 10/20

Founder’s Note:

ES Futures are 10 pts lower to 4,292. Key SG levels for the SPX are:

• Support: 4,260, 4,250, 4,225 & 4,200
• Resistance: 4,300 & 4,350
• 1 Day Implied Range: 0.76%

TLDR: We anticipate the SPX closing in the 4,250-4,300 area today, which heavy support into 420SPY (SPX 4,225). Resistance remains in the 4,325 area (SPY 430). Overall its hard to have a lot of conviction today due to high IV + expiration + weekend geopolitical tensions, but our strongest view is that we do not anticipate a strong relief rally today due to an unlikely Friday decline in IV/VIX.

Today’s expiration, as shown below, is quite put-heavy (blue bars vs orange). With this expiration we estimate ~10% of delta & ~25% of gamma will expire across the S&P/Nasdaq/Russel Indicies/ETFs. The bulk of this is put positions, which we believe have functioned to pull down equity prices both yesterday and today. The removal of these puts could provide some short term relief for equities next week (more on this below).

This relief is displayed in the basic gamma curve below, wherein negative gamma shifts up from current levels (teal line = today, gray line = Monday’s forecast). Less negative gamma = fewer put positions = less dealer downside hedging pressure.

Component two here is VIX/implied volatility. We had marked the window for equity “unpinning” as Wednesday VIX expiration. Into Wednesday, the SPX was resilient in the face of escalating geopolitical tensions and higher rates, which led to a pin in the 4,350-4,380 range. As you can see, that pin broke right after the Wednesday VIX AM expiration.

Tied to these equity moves, we’ve discussed the link between rates and volatility at length over the past few weeks. Into last Friday, as yields (10Y shown below in blue) shifted, the VIX (candle plot) moved in lockstep. That correlation saw a sharp, short term deviation last Friday when traders rushed in to buy weekend volatility protection (green box), and this drove this VIX up toward 20. This vol bid in turn pushed SPX down to 4,325. This was VIX moving over rates, as you can see by the 10Y not moving higher on Friday (under green box).

On Monday AM we reiterated that the VIX should mean revert as geopolitical hedges rolled off, and into the downward VIX pressure of Wednesdays VIX expiration. This reversion/decline in VIX/volatility came, and helped in turn to boost the S&P back into the 4,375 area on Monday & Tuesday.

This equity rally/VIX pin was in the face of higher rates, which started to move markedly higher on Monday as highlighted by the blue arrow. As is shown rates continued higher Tue/Wed (red box), but, again, the VIX remained pinned down at 17.50, which corresponded with SPX in the 4,350-4,380 range into Tuesday PM.

VIX Expiration landed on Wednesday AM at 9:30 ET, and VIX immediately ratcheted higher, with equities sliding to 4,300. Powell failed to talk down rates yesterday, which provided the final leg higher in VIX/leg lower in SPX <4,300. We now have the US 10Y at major 10+ year highs, with the VIX matching at recent highs.

Figuring into volatility today is the geopolitical situation, which likely supports VIX/volatility on the day. We’d wager that there will not be much short-vol demand over this weekend as traders seek to avoid geopolitical risks. This removes vanna as a component of equity upside.

However, for Monday the weekend vol premium could come for sale, which couples with a large tranche of expiring equity puts. This could lead to a short term relief rally to start next week, back into the 4,350 area. We do not think that 1-2 day relief rally will be the start of a more material, long term move unless there is a surprise break in rate or geopolitical tensions. Ultimately, we think that the rate situation is unlikely to clear up until Nov 1st FOMC, a date which should mark a larger, long term directional trend in equities.