Macro Theme:

 

 

Short Term SPX Resistance: 4,800

Short Term SPX Support: 4,750

SPX Risk Pivot Level: 4,700

Major SPX Range High/Resistance: 4,800

Major SPX Range Low/Support: 4,500

‣ We look for higher volatility (i.e. more market movement) starting this week (12/18), out of the huge 12/15 OPEX.*

‣ 4,800 is our current max upside target, due to a Call Wall shift on 12/19. Call Walls in QQQ/IWM are at 410/205.*

‣ A downside break of 4,700 is our interim “risk off” level.*

‣ January OPEX is setting up to be a major event, with a risk that expiring large long call positions could pull markets lower mid to late January.*

*updated 12/19

 

 

Founder’s Note:

ES Futures are off 9pts to 4,813. Key SG levels for the SPX are:

• Support: 4,750, 4,700, 4,659
• Resistance: 4778, 4,792 & 4,800
• 1 Day Implied Range: 0.89%

In QQQ, which closed yesterday at its all-time high of 490.16, faces resistance at the 410

Call Wall,

with support at 408 & 405.

IWM resistance remains at 200 & 205

Call Wall,

with support at 193b & 190.

This morning is VIX expiration at 9:30 AM ET. Active traders should be aware of odd shifts or jumps in equity futures around that time.

The grind higher continues, with our data showing stagnant

Call Walls

(SPY/SPX/QQQ unchanged), and the systematic rolling up of call positions. You can see this in the QQQ OI change chart below, where small in-the-money calls were net closed and new calls were added overhead. Charts for the other major indexes/ETF’s look the same. This options rolling should be supportive of equities, but may also serve to keep a lid on volatility.

Back to the VIX, as you can see in the plot below, there are large VIX put positions (+100k) expiring today from strikes 18 – 11.

What’s intersting here is that the VIX made a nearly 4-year low of 11.8 at last weeks FOMC, but has been unable to work lower despite higher S&P prices. This morning we see the VIX at 1-week highs of 12.75, this is into the face of 1-month realized SPX volatility at multi-year lows of ~7%. Our models have been looking for a bit more volatility in the S&P (i.e. 1-day SPX implied move is now 89bps vs ~50’s last week), but movement has just been a drip!

Nomura has flagged this (h/t ZH) somewhat odd VIX stickiness, showing that the VIX/SPX beta is at major lows. They remark that “VIX option dealer short convexity [is] building overhead”, which seems to imply that a pickup in VIX call buying for next year may be holding up the VIX, despite the grind higher in S&P.

We can also frame this deviation between VIX & SPX movement through the plot below, which shows the spread between the VIX and 1-month SPX realized volatility. We’re above the long term mean which feels a bit surprising given that Powell seemingly waived an “all-clear/risk on” last week.

There are also many, like us, who have been on the watch out for “Spot Up, Vol Up” (or SPX up/VIX up, in sync with our higher 1-day implied move), but the SPX movement has been fairly sluggish. Yes, the SPX seemingly goes up each day, but it does so in ~30bps increments rather than +1% jumps.

Ultimately, while we do not have a strong edge to offer on this, we would not be surprised to see the VIX make new lows after this expiration with OPEX having created a “pinning” effect. This feels particularly true over the holiday-heavy period into end of year wherein traders may be incentivized to be short volatility. Short volatility could help boost equities (its at least a tailwind), and the chart below implies that VIX could have a fair amount of downside available.

Where does this leave us, in terms of equity price action? We’re starting to discount the odds of a blow-off move. This does not mean equities have to reverse lower, more that the clock may be running out on an explosive move, with “dullness” ahead.

We start turning to this as first,

Call Walls

are stagnant which suggests major indices are rubbing up against major resistance. Second, we can see a cooling of upside-strike IV’s via the Fixed Strike Matrix. In the crudely drawn trapezoid below you can see relatively dark green to red, which implies that from the FOMC to today fixed strike IV’s are flat to lower. If there was a strong bid to these IV’s, one would expect a brighter shade of green. This reads to us like traders are positioned to collect some holiday theta decay via short calls vs long those call for an major rally.

There is a chance that VIX expiration may trigger some equity movement today, but baring that SPX “drift mode” may engage into the upcoming holidays.