Macro Theme:

 

Short Term SPX Resistance: 5,017 (SPY 500)

Short Term SPX Support: 4,970

SPX Risk Pivot Level: 4,900

Major SPX Range High/Resistance: 5,100

Major SPX Range Low/Support: 4,800

‣ Volatility should continue to contract into 2/14 VIX expiration – 2/16 equity expiration. Major downside “risk-off” occurs on a break of 4,900, which is our first major support. 5,000 – 5,015 (SPY 500) is major resistance.*

*updated 2/9. Our view above, from 2/7, was updated to account for the huge gamma size at SPY 500 (SPX 5,015 equivalent).

 

Founder’s Note:

ES Futures are up 12bps to 5,024. NQ futures down 10 bps to 17,900.

Key SG levels for the SPX are:

• Support: 4,970, 4,950
• Resistance: 5,000, 5,015, 5,050

  Call Wall

• 1 Day Implied Range: 0.55%

For QQQ:

• Support: 432, 430, 425
• Resistance: 440

  Call Wall

IWM:

• Support: 196, 190
• Resistance: 200

  Call Wall

TLDR: Expirations and the upcoming NVDA ER’s are set to offer a lot of two way volatility. There is a lot shifting it terms of positions and elevated vols, and this creates a lot of noise which could make markets a challenge to navigate over the next week. We’re neutral in terms of price & vol, with expiration and NVDA earnings just ahead. As price (& time) shifts, the markets should show its hand.

With VIX expiration (and its associated volatility) behind us, the S&P500 reverted back to its largest gamma strike zone: SPX 5,000 – SPY 500 (SPX 5,017). SPY 500 is the largest gamma strike across the S&P500 complex, and, when combined with our SG 1-day implied move of just 55bps, a likely pinning area for today. It’s also likely to remain a key level into tomorrow’s OPEX.

There was a lot of attention in media, twitter, etc, given to the spike in tail risk/skews on Wednesday, after the big VIX spike on Tuesday. As we stated in yesterdays note, Tuesday’s vol move had reverted back to “neutral“, and the VIX customer selling volume into Tuesday’s 18 spike was very large. Accordingly, throughout the morning vols were not able to catch a bid, and so that bit of vanna energy that had built up was directed into pushing equities higher. In fact, if you look at the fixed strike IV comparison from yesterday to Monday PM (pre-CPI & VIX EXP), vols were lower, despite the SPX being ~1% lower.

Now, with the SPX essentially back to pre-CPI levels of 5,005, we are interestingly seeing vols slightly higher than Monday, as indicated by the “+x%’s” in the grid below. This could be due to retail sales & PPI due out at 8:30AM ET, but it reflects back to us like vol/put sellers stepped up into the first round of weakness (yesterday), but their market-pushing-potential has been used up. The easy money was made.

This mornings mildly higher IV’s suggest we’re not out of the woods for another downside test to 4,900, however, in this market, we must respect the desire to push the market back to highs.

Below is a screenshot of what we posted on Tuesday’s note, and it still stands today. The dip to (near) 4,900 was bought, and we’re now back to neutral. As positions are shifting around expirations it can create a lot of head-fakes, but, at the moment there are two constants we feel pretty comfortable with:

• 5,000-SPY500 (5,017) should remain the largest gamma strike into tomorrows expiration. After that, the 5,000 area pin could be pulled. If the SPX remains over 5,000 bulls have the edge.
• If fixed strike vol declines into selloffs, the market is likely to bounce. This is critical to watch into SPX 4,900

The problem here for bears is that call skews are still heavy (as we will show below), and this bout of market weakness looks eerily reminiscent of January’s expiration related weakness (red box, left). You may recall that into the evening of Jan OPEX, the market shot out like a cannon (red arrow). These high single stock call skews indicate negative gamma – and that works in both market directions because dealer hedging flow has to chase in either direction. So we have to respect that there is still potential for a strong move higher.

Any potential move higher is going to have to wrestle with “the king” NVDA’s earnings on 2/21. Shown here is skew for 3/15 expiration from Monday (gray) vs last night (green). As you can see, vols are now higher (green line above gray), but the call skew is still the same. This is to say that bullish expectations are unfazed by anything that happened over the last 1-2 sessions. We still remain of the view that this call skew is a very high bar for the stock price to overcome, and earnings could accordingly mark a period of consolidation for the stock as earnings event IV subsides.

And, because it is the leader of the AI/Semi revolution, any pause in NVDA could lead to a pause in tech-heavy equities, generally.