Founder’s Note:

ES futures are +10bps to 5,310. NQ futures are +25bps to 18,750.

Key SG levels for the SPX are:

• Support: 5,270, 5,260, 5,250, 5200
• Resistance: 5,300, 5,312, 5,328, 5,350
• 1 Day Implied Range: 0.54%

For QQQ:

• Support: 452, 450, 440
• Resistance: 455, 460

IWM:

• Support: 200
• Resistance: 205, 208, 210

ISM Services 10AM ET.

Short dated implied vols remain mildly perturbed ahead of today’s ISM PMI, which then feeds into Friday’s NonFarms data. Markets will likely give very short term, jumpy reactions to these data points, but (barring a major tail print), we continue to think a larger directional break won’t happen until 6/12 FOMC.

With that, we remain in the neutral zone of 5,250 – 5,312 that was highlighted on Monday. With that, 5,312 (SPY 530) is major resistance for today, with 3 layers of support below at 5,270, 5,260 & 5,250.

Just last week when the SPX tested 5,200, many were making proclamations that a massive state change in volatility was underway, and a dangerous summer was ahead. Yesterday we saw the opposite, with bullish narratives flashing across our screens. The bottom line is that no one knows. A bullish data point today, could be unwound by a bearish NFP print on Friday, which could then be unwound (or rewound?) by Powell next week (FOMC 6/12).

We’re simply waiting for the conjunction of price & time.

Edge generally goes to the bulls, simply because implied volatility usually comes off after these events, which is a tailwind for equities. Further, if the SPX can reclaim SPY 530, then material positive gamma should come into play, which is also supportive of equities as dealers should be buying dips. We would be cautious in getting long >530 SPY ahead of NFP & FOMC, but should that happen we would be looking to enter into some type of short dated call structures with a max profit point around 5,400 (

Call Wall

). Ideally we hold <=530 SPY until FOMC, and a benign FOMC passes, which allows for more of an “all clear” long.

A quick note on 5,400 – its currently peak positive gamma, and a likely short term resistance area even post-Powell.

The downside scenario remains the same as the last several days: a break of 5,250 likely invokes another test of 5,200. We’d expect strong support there. A break of 5,200 likely signals a move to 5,000. 5,000, we, think, is very large support.

Turning to implied volatility, we find that its fairly valued, no matter how you cut it. Below is the VIX – 1 month SPX realized vol, and as you can see we are only a bit above the long term mean/spread, with “slightly above the mean” making sense given FOMC ahead. If Powell passes without incident, then we’d expect this spread to move lower as VIX/IV deflates.

Looking at 1-month realized/historical SPX vol, we currently measure it at an incredibly low 7.6% (green line). If you add ~3.6 points to this (the mean from the above chart) you arrive at a fair value VIX of ~11, which is what we’d anticipate seeing by the end of next week in a bullish scenario. And, to us, that scenario sets up a ultra-low volatility, 2017 style summer, as focus turns to the election.