Macro Theme:

Short Term SPX Resistance: 4,210 (SPY 420)

Short Term SPX Support: 4,150

SPX Risk Pivot Level: 4,220

Major SPX Range High/Resistance: 4,300

Major SPX Range Low/Support: 4,200

‣ We look for the S&P to hold 4,200 – 4,300 into Nov 1st FOMC*

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

*updated 10/25

Founder’s Note:

ES Futures are -58bps to 4,185. Key SG levels for the SPX are:

• Support: 4,174, 4,162, 4,150, 4,100
• Resistance: 4,200, 4,212, 4,250
• 1 Day Implied Range: 0.81%

For QQQ, support is at 350, then 345. Resistance is at 355.

GDP is a t 8:30AM ET, with AMZN & INTC reporting tonight.

META is -2.6% after last nights earnings, and the 10Y rates remains near recent highs at 4.95%. Neither of these (earnings, rates) are adding to the long equities narrative.

Below is a plot of the VIX (candles) vs 10Y (blue) which illustrates the pressure equities are under as rates shift higher. It is going to take Wednesday’s 11/1 FOMC to “make or break” this link going forward, as without a pause or decline in rates stocks are going to struggle.

Futures are currently indicating an SPX open under our key support area of 4,200. The 4,200-4,225 area now likely functions as resistance. Our daily SPX range remains fairly tight at 81bps suggesting that volatility is net yet set to break out, and equity declines will continue to be fairly controlled.

How are traders reacting to these higher rates? The VIX +20 certainly has negative optics in that it portrays high levels of stress, and implies that traders are looking for ~1.3% daily moves in the SPX. Currently 1-month realized vol [RV] in the SPX is 13%, or ~85bps daily SPX moves, which informs us that there is a healthy risk premium in today’s market.

The spread between VIX & 1-month RV is plotted below, and as you can see the spread is elevated, but not yet extreme (i.e. +90th percentile). When this spread collapses/shifts back to its mean – that is when equities can stage strong rallies. The issue here is that, in line with the earnings/rates issues outlined above, there is nothing to relieve this IV pressure and rally stocks until 11/1 FOMC. Compounding this is the geopolitical situation, which has led to long tail risk demand on Friday’s in order to hedge weekend risk.

We had & have been viewing this week as one wherein the SPX would hang around its equilibrium/”fair value” range in the 4,200s, but that fair value is being pushed under by poor earnings (Magnificent 7 Index -2.2% yesterday). The equilibrium, or fair value, appears to have slid lower.

From a positioning standpoint, the

Put Wall

has rolled lower for SPY, to 410 from 420. However, the SPX & QQQ

Put Wall

s remain at 4,200 and 350, respectively. When

Put Wall

s roll lower we read it as a bearish sign, as traders are adding to puts at lower strikes. This was clearly evident in SPY which tends to have more active open interest vs SPX (i.e. traders shift & roll positions more frequently). As you can see below, its evident that traders rolled 420 SPY puts down to 410’s.

However, the fact that the

Put Walls

did not roll lower across the board suggests a lack of put demand despite market pressure.

This lack of put demand is keeping the pressure off of realized volatility. So, while lower equities prices likely do not feel great, things have not yet broken. This was often the case in 2022, wherein long puts seemed to underperform as downside hedges. The narrative around this has been that was with rates rising traders are simply selling their long stock positions rather than buying put protection. This lack of long put protection keeps a relative lid on volatility, as it reduces dealer short-hedge demand. Backing this point was that the 2022 VIX high was in January, despite equities going much lower and the start of the Ukraine war.

Here, as rates creep higher, and earnings are iffy, that narrative may continue to be in play as equities grind lower, but volatility doesn’t really pop. The downside has been largely a grind and culmination of smaller moves rather than -2 to -3% downdrafts.

Shown here is a plot of the intraday change in the SPX (% close-open). As you can see there have been infrequent intraday absolute moves >1% vs consistently large intraday swings in 2022.

This highlights the importance up the upcoming FOMC, wherein we are likely to see an uptick in realized volatility, with several ±1% moves. These moves would be driven by that elevated VIX-RV spread, which is a signal that vanna is important as a driver of equity prices.

Its also has implications for traders who are playing these daily ranges, wherein often we feel like “the big move is finally here!”, but the moves mean revert/stall out. We’ve seen this work both to the upside & downside in recent weeks. Shown below is yesterday, wherein was moved sharply to 4,190, but then stalled for the remainder of the day.