Macro Theme:

 

Short Term SPX Resistance: 4,200

Short Term SPX Support: 4,150

SPX Risk Pivot Level: 4,220

Major SPX Range High/Resistance: 4,300

Major SPX Range Low/Support: 4,100

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

‣ We view 4,000 as a major support level for the S&P500 into Nov OPEX*

*updated 10/30

 

Founder’s Note:

ES Futures are +20bps to 4,195. Key SG levels for the SPX are:

• Support: 4,165, 4,150, 4,125, 4,100
• Resistance: 4,200, 4,215
• 1 Day Implied Range: 0.85%

In QQQ, support is at 345, with resistance at 350 & 355.

Equities found some bounce yesterday & this morning, buoyed by lower VIX/IV. The lower IV’s are driven by reversion from Friday’s “weekend conflict tail risk bid” (as noted on the chart below, and in yesterdays Q&A), but also US rates, which are drifting lower (black line).

As you can see, there has been a major correlation between rates and equity vol, and that correlation likely comes into its full expression with tomorrows FOMC. If rates stay flat to lower it will likely trigger a strong short-cover bid into equities as outlined yesterday AM.

For today VIX/IV is unlikely to fully break down due to tomorrows FOMC. This signals that an equity rally is likely limited, with 4,200 – 4,215 as major resistance into tomorrow afternoon. 4,150 is should function as support for today. Prices are likely to remain jumpy and fleeting, which suggests that while this mornings futures are up, they could be subject to quick reversals should IV and/or rates reverse course.

We were asked to provide some post-FOMC outlook for the RUT as we did for the SPX, yesterday.

For the RUT and NDX, we tend to focus on positioning in IWM/QQQ respectively. This is because the options complex for the ETF’s is much larger than in the indexes.

For RUT/IWM, what strikes us is that November is a very large expiration, and its very put-heavy (blue bars). This syncs with the small cap index hitting ~1 year lows. On its face, this infers that volatility is expected to remain high in through Nov OPEX, but the impact of the expiration itself is path dependent. If Powell is hawkish and pressure remains on stocks after FOMC, then we would highlight Nov OPEX as a turning point as large put positions expire.

However, if Powell is perceived as dovish, there is a large put-burn that could start to take place immediately. This could lead to outside outperformance of the small caps, as the large put position unwinds and fuels a rally.

What will be interesting with a bearish FOMC is how IWM reacts to the 160 line. We see some evidence that this could be a major short term low, as our gamma models work higher at strikes <=160 (i.e the curve goes up to the left of the chart). This signals that not only are put positions lighter in IWM <160, but also that downside hedging pressures could be relieved if IWM breaks lower. 160 is also the low of IWM going back to 2020.

In summary, our map of price action shows bearish hedging influences from ~164 – 160. We’d read a break <160 as oversold. Above 165 we would be constructively bullish, with 170 the short term upside target for the week. 180 would be our high price into Nov OPEX.