Macro Theme:

Short Term SPX Resistance: 4,800

Short Term SPX Support: 4,700

SPX Risk Pivot Level: 4,700

Major SPX Range High/Resistance: 4,815 (SPY Call Wall)

Major SPX Range Low/Support: 4,600

‣ 4,815 is our current max upside target, due to a Call Wall shift on 12/19. Call Walls in QQQ/IWM are at 415/210.*

‣ 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.*

‣ Implied volatility remains muted despite recent equity market weakness, with a surge in demand for long volatility (i.e put buying) is a potential driver of equity weakness.*

*updated 1/11

Founder’s Note:

ES Futures are flat to 4,820. Key SG levels for the SPX are:

• Support: 4,745, 4,720, 4,700
• Resistance: 4,774, 4,800

  Call Wall,

  4,815 SPY Call Wall

• 1 Day Implied Range: 0.66%

For QQQ:

• Support: 405, 400
• Resistance: 410, 415

  Call Wall

IWM:

• Support: 194, 190
• Resistance: 200

Traders are watching this mornings CPI print at 8:30AM ET.

SPX term structure is in full “swoosh mode” as very short dated IV’s are elevated due to the CPI print. The SPX ATM straddle (ref 4,780) is priced at $32.9, or 68bps. However, as discussed yesterday, IV declines sharply after this week (to right of the green box) and into the 2/1 FOMC. Therefore it seems that while there is a bit of angst around this AM’s print, traders continue to price in low volatility/risk out past this week.

As another measure of risk sentiment, we flag the VVIX index, which measures the price of OTM VIX calls vs ATM VIX Calls. As shown below, this index has collapsed over the last week, and is now at its lowest level since the March ’20 Covid-Crash. This is a signal that traders are not looking to own upside VIX calls as a downside equity hedge.

This low-risk pricing in options IV’s/VIX is itself a risk, should the CPI come in hot and change forward inflation expectations. We believe it also presents a lower bar for a “miss” in CPI, as IV’s would have to react from a much lower relative level. If instead IV’s were extremely elevated, the CPI print would have to miss by much more in order to generate a response to justify very high IV’s.

As an example, if today’s straddle was $60, or pricing in a 1.2% move, even a pretty decent CPI miss could result in today’s options being overpriced, which leads to a drop in IV and equity-supportive hedging flows.

For today, which shows a ~$32 straddle/68bps move, it would take a lower CPI deviation, and the reaction to that CPI miss could push the straddle offside (i.e. the SPX moves more ±68bps). This could then bring volatility-inducing hedging flows.

While those volatility-inducing flows could technically push the market in either direction, we think the risk-reward here is skewed to the downside. The SPX/SPY

Call Walls

remain heavy at 4,800/480 (SPX 4,815), which is our current overhead resistance band. This upside level is also in line with current SPX implied moves of ~66bps (as seen in our 1-day implied move, and the SPX straddle). A hot CPI could today place 4,700, our major downside support line, into play. We continue to mark <4,700 as a significant risk-off level.