Macro Theme:

 

 

Founder’s Note:

ES futures are +15 bps to 5,525. NQ futures are +35 bps to 19,825.

Key SG levels for the SPX are:

• Support: 5,450, 5442, 5,420, 5400
• Resistance: 5,462, 5,481, 5,500, 5,510
• 1 Day Implied Range: 0.67%

For QQQ:

• Support: 470
• Resistance: 475, 485

IWM:

• Support: 200, 195
• Resistance: 205

Trading ranges were indeed wider yesterday, having rejected from just below the 5,500

Call Wall

to close down at 5,450 support. We think similar, wider ranges are on tap for today as post-OPEX flows are cleared out, and stability (via new options positions) is re-built. On this point we now see new support bars at 5,442 and 5,420, which came in yesterday. 5,400 remains major support.

To the upside we mark 5,481 as first resistance, followed by the

Call Wall

at 5,500.

Yesterday’s equity market weakness seemed to have people scratching their heads, particularly with the NVDA reversal.

While the S&P lost just 33bps, the NQ fared worse at -1%, but NVDA dropped a sharp 6.7%. This was one of the worst relative performance days for NVDA vs QQQ, as shown below. Of course, this was the day after a massive call-heavy OPEX wherein the stock was up 30% heading into Friday AM. The stock is up this AM, to $121.

If you follow the options market you wouldn’t be surprised to find that NVDA’s worst relative day in the last year was on OPEX day, 4/19.

On this point, on 6/18 we had recommended QQQ put spreads into OPEX, but have lower conviction on that trade now that QQQ is down 2.5% from those highs.

What’s our point?

We’ve been of the opinion that much of NVDA’s performance is from the leverage of the options market. Massive calls being bought force market makers to buy the stock, increasing the speed at which the stock goes up. This is “stock up, vol up”.

All that upside energy cannot just dissipate, it has to express itself when the stock reverses, too. In other words, you don’t get a “stock rips and pins”, you get a “stock rips up, then plunges down”, and this can happen over multiple time frames (intraday, daily, weekly, etc).

Further, we think the peaks of NVDA price momentum (both when stock is rapidly move up & down) occurs when large OPEX positions are removed as evidenced in the chart above. Remember the gamma of options positions is highest just before OPEX, which means hedging flows should adjust more rapidly, thereby shifting NVDA stock price.

The second piece here relates to the big correlation trade everyone is talking about (see our video from April).

The low correlation means that NVDA (and other high-flying stocks) are going to have violent relative bouts of correction, like we saw yesterday with NVDA -7% vs SPX – 0.3%. This low relative performance of SPX vs NVDA on down days is a feature of correlation trade, not an unwind of it. The unwind of that trade is something getting attention as it may have a major market impact (i.e. specters of Volmegeddon), but that unwind would likely have to be forced by a macro event like a credit issue, or geopolitics.

We caught a taste of this unwind in April, when rates went up and geopolitics flared. The chart below does not do it justice, but serves the point: correlation jumped higher (top), while the SPX dropped 5% vs NVDA 20%.

Maybe both rates and geopolitics flare back up in the coming weeks, but in the short term that feels unlikely. The big takeaway here is that means SPX likely remains supported (dips get bought) – regardless of NVDA returns.