Macro Theme:

 

 

Founder’s Note:

ES futures are -10bps to 5,536. NQ futures are -10 bps to 19,985.

Key SG levels for the SPX are:

• Support: 5,462, 5,450, 5,423, 5400
• Resistance: 5,500, 5,510
• 1 Day Implied Range: 0.65%

For QQQ:

• Support: 479, 475
• Resistance: 480, 485

IWM:

• Support: 200, 190
• Resistance: 201, 205

GDP & Jobless claims 8:30AM ET

There is very little happening on the equity Index side, with vols, both realized & implied, sinking. Large gamma resistance remains overhead at 5,500 – 5,510 (SPY 550), with big support at 5,460-5,450. A break of that 5,450 level likely invokes a test of 5,400, which is another major support level.

Regarding today’s GDP print, the options market couldn’t care less. Today’s 0DTE straddle is at $20. Thats a lowly 37bps of expected movement on a 14% IV. That IV is so low you likely don’t want to short it – which doesn’t make it a great buy, either as we see major resistance just 25 handles above (5,500) and below (5,450).

Zooming out negative macro narratives you carry will have to combat a lot of flow determined to keep index vol very sleepy. That is in contrast to single stocks which continue to remain elevated.

This is the “correlation trade”, which has been flaring up as a major talking point in media over the last week, and a key thing on our radar for the better part of the last year (ex: our video from April & conversation with Noel Smith).

The collapse in correlation, which is a feature of select single stocks (i.e. NVDA) moving at a much faster pace relative to S&P/Indexes. Correlation indexes have been hitting all-time lows, as seen in the CBOE 3 (COR3M) & 6 month (COR6M) forward measurements. These indexes look at difference between 3 & 6 month single stock IV’s vs equivalent SPX IV’s.

We now see that the CBOE 1 Month Correlation Index (COR1M) plunged the last 2 days, as you can see below.

This has placed this 1-month correlation metric equal to 2017 lows! Again, these COR indexes are constructed using options implied vols from 1, 3 & 6 months ahead in time, so in a way they are forward looking.

2017 is one of the most significant years in volatility has the SPX hit all-time lows in 1-month realized vol of ~3.5 in late Q3. Currently we’re at ~7.5% in 1-month realized vol (as discussed in yesterdays note). In our view, this drop in correlation is a suggestion that index vol is set to slide even lower which equates to VIX dropping, and SPX trading ranges getting even tighter. 2017 was also famous because those volatility lows created Volmegeddon in 2018, as short vol traders were forced, in unison, to cover.

This lines up with a market that knows the election is not terribly far ahead, and policy is likely to be supportive, but stagnant. That leaves these predominant flows of shorting index vol, and long single stock vol, free to dominate. Maybe the market destabilized after the elections – who knows.

Pre-election, for this correlation to unwind there would have to be a major credit event or significant geopolitical escalation. Europe credit markets recently rumbled, but appear to have, for the moment, settled down.

The takeaway here is that unless the market is hit over-the-head with a risk off trigger, dips are likely to be bought, and the Index grind-up is likely to continue.