Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 15bps. CL is down 1% to 88.

We remain locked in SPX positive gamma – just as we have been for weeks. This supports SPX prices, with support at 7,560 and 7,540. Resistance is at 7,600.

As many of you know, the COR1M indicator took out the 8 level yesterday, which we view as a major signal of risk. This is a signal that upside, call-induced froth is in and of itself becoming a risk to the market. The critical thing to point out here is that many of our other metrics are flagging almost there for a full “red alert”, but not quite. We have certainly reached the point at which we will start dipping our toe into downside plays, and will look to move more meaningfully into these short positions over the next week.

Here is the great thing about piecing into a few short positions: puts are cheap as no one wants them.

The reason we hold off on heavily shorting is because its also in these late innings of froth that massive gains are made. Nearly every day some stock or sector is ripping +20%. Today is DELL, which is 30% higher after earnings. That is risk-on behavior.

Consider below, where we plotted out a matrix of IV Rank (x-axis) vs Skew Rank (y-axis). We summed the number of days a given stock landed in the matrix, with the top 25 stocks in the SPX (left) and NDX (right). Additionally we have plotted the most recent value for the top 25 names. What you see is nearly all the stocks are currently pinned to the top (skew rank +90), with many NDX constituent IV Ranks landing with IV Rank +60%. This is a “crash up”. To unwind these we need a catalyst, and as we’ve been highlighting the mid-June window offers catalysts in spades: CPI, SpaceX, OPEX, FOMC…maybe even oil.

We’re certainly not energy analysts, but charts like this are making the rounds, with comments from XOM execs stating how dire things are getting: “You can debate whether that’s goin to hit, those really low levels, in two weeks or three weeks Once you get to that point, then you’ll see price shoot up.” We’ll see.

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