Macro Theme:

Short Term SPX Resistance: 5,300

Short Term SPX Support: 5,250

SPX Risk Pivot Level: 5,200

Major SPX Range High/Resistance: 5,300

Major SPX Range Low/Support: 5,000

‣ 5,300 is the short term upside target.*

‣ 5,200 is critical support, up from 5,100 on 3/20. Below 5,200 is our risk off indicator.*

‣ 5,300 is our target into April OPEX.*

‣ NVDA’s event on 3/18 failed to renew the call bid in the chip sector, likely triggering longer term consolidation in the space (ref: 216 in SMH).**

*updated 4/1

**updated 3/19

Founder’s Note:

ES are -20bps to 5,285. NQ futures are -25bps to 18,450.

Key SG levels for the SPX are:

• Support: 5,210, 5,200
• Resistance: 5,250, 5,269, 5,275, 5,300
• 1 Day Implied Range: 0.66%

For QQQ:

• Support: 445, 440
• Resistance: 450, 460

  Call Wall

IWM:

• Support: 210, 207
• Resistance: 215

  Call Wall

Yesterday’s price data showed sticky inflation, and that zapped the early equity market gains. Today we have ISM services at 10AM ET, and Powell tomorrow at 12:10PM ET. While these recent signals of higher inflation may pause the YTD equity rally, we think the equity market will continue to digest the removal of cuts, but would certainly spasm if talk flips to something like hikes (very doubtful). While we do not want to wade into the macro, we would flag that it was only in December ’23 that traders were pricing in 6 rate cuts in ’24, and that number has since been steadily revised down to 3.

The reflection of this current market concern is seen in the SPX term structure, wherein we now see IV’s lifted off of YTD lows (shaded gray cone), but the overall IV levels are really rather benign. While the SPX remains >5,200, it benefits from the embrace of positive gamma, which brings dealers flows that lead to mean reversion. Dips are bought, rallies are sold. Should the SPX move below our risk-off level of 5,200, we would look for IV’s to move materially higher.

Somewhat related to the IV’s was the fact that we yesterday saw a lot of longer dated call selling across top stocks. This was not record-setting flow, but it was material. As an example we posted the

HIRO

chart for Mag7, below, and you can see the All Exp call flow (orange) was sharply negative on the day. Interestingly, short dated Next Expiration puts were sold (teal), too, which sets up as a narrative of “we may be nearing a long term top, but aren’t going to crash this week”. While one day of flow does not create a trend, we will be watching this dynamic closely, particularly if that “higher for longer” narrative perks back up.

The true signal of concern will be when traders elect to purchase longer dated puts, which is something we’ve not seen for many months.

We have been working on a longer term presentation around the aspects of equity volatility suppression through the lens of systematic call overwriting and 0DTE’s. While we do see evidence of these flows suffocating equity volatility, the truth is that volatility is generally low across assets. If we just consider the MOVE index (candles), which is the treasury bond VIX, it has just moved back <100 for the first time since Jan ’22.

Most of us are all aware that the main driver of rate vol, which triggered equity vol (VIX, orange, above), was higher inflation & the pace of rate hikes. These all moved in sync, as the chart above suggests.

In recent history portfolios have been structured in some flavor of “60/40” wherein treasury bonds are held as a way to hedge equity positions. This worked well enough as the two assets were negatively correlated up until ’21. Now the correlation is positive, which implies that if bonds go down, equities will, too. This further suggests that if investors want some type of protection in their portfolios, the only answer may be long volatility positions, which has to be achieved through long options.

From our seat in the equity derivatives space, that means traders will at some point have to first cover from a distinctly unhedged equity long/short volatility position, often outright short puts, and then into a long volatility position. That “long vol” is the risk that lurks underneath this equity market, wherein recent periods of selling have been met with dip buyers/volatility sellers. That volatility supply is based on a combination fragile narratives (ex: “AI”,”Fed Put”), and short dated systematic flows (ex: 0DTE/HFT/arbitrage/etc). As such, the primary volatility supply is fleeting because its forward looking time period is measured in days, and may disappear in critical moments.

The trick here is that these conditions have been building for months, and we think may persist in through the elections. However, because we think there is so much flow that has to be unwound in a risk-off scenario, we can afford to wait for the first shot to be fired, rather than anticipate the trigger being pulled. In this case, its a move <5,200, which would signal that a base of support has been lost and volatility should increase. The point here is that when markets move risk-off, you likely want to give edge to dips being bought, but to prepare for large unexpected jumps in vol (i.e. tails).