Macro Theme:

 

 

Founder’s Note:

ES futures are +20 bps to 5,531. NQ futures are +15bps to 19,957.

Key SG levels for the SPX are:

• Support: 5,460, 5,450, 5400
• Resistance: 5,500, 5,510, 5,528, 5,550
• 1 Day Implied Range: 0.65%

For QQQ:

• Support: 480, 479
• Resistance: 490

IWM:

• Support: 200, 190
• Resistance: 204, 210

ISM Manufacturing PMI 10AM ET

Equities gave up strong early gains on Friday, as the SPX tested & rejected the 550 SPY

Call Wall,

subsequently falling 1.2% to 5,460. 5,460 (SPY 545) – 5,450 remains a major support level for today, with resistance at 5,500 – 5,520 (SPY 550).

We noted Friday AM that equities could be a bit more volatile on Friday due to month/quarter end flow rebalances, including large rolls in the options space.

While we had felt volatility would express to the upside in equities on Friday, bearish options flows came in strongly at 10AM, just when the SPX hit AM highs. These flows were nearly 100% 0DTE (teal line), and sizable at ~3.5bn over 45mins. Because these flows were predominantly 0DTE, it reiterates the idea that much of market movement on Friday was due simply to “positional adjustments”, and not some more nefarious “value rejection” of new equity highs.

As we look forward, we see the SPX

Call Wall

has jumped to 5,600, with the SPY

Call Wall

remaining at 550 (SPX 5,520). This informs us large positions have built up overhead, as can be seen in the gamma-by-strike plot below. As a result, should the SPX slide up into 5,500 area, dealer flows should be stabilizing due to positive gamma dynamics. We are still in the camp that we test 5,500, and continue higher into July OPEX. This is due to the upcoming holiday week + Powell tomorrow (more on this below).

The interesting counter side to this, is that the downside is deteriorating. You can see this in the chart below, wherein the gamma at 5,450 & 5,400 is relatively lower than at upside strikes. Therefore, should we break <5,450 we may see a quick jump to 5,400 as there is less stabilizing flow (i.e. less positive gamma) to the downsize. “Less stabilizing flow” is different from “destabilizing flow” (i.e. negative gamma), which would mean dealers short into lower equities. We do not see that scenario materially entering unless SPX breaks <5,300.

Back to our edge for higher markets, you can see that SPX IV is near 90-day lows (gray shaded cone). We have ISM PMI today, Powell tomorrow, and NFP on Friday, which is keeping a small event-vol bid (teal line up off of 90-day lows). If you look out in time, you can see that IV’s remain at 90-day lows – traders see low risk.

Markets are also closed on Thursday, due to July 4th. This is extra decay, which, we believe, means traders are simply looking to hedge out a tail print from upcoming data and if these data prints prove to be benign it likely provides a vanna-boost to equity prices. If the SPX gets >5,500, a material amount of positive-gamma support is then added, which is a strong signal of positive forward equity returns.

The other dynamic here is that of the election, and traders pricing in higher odds of a Trump victory. Below we have Dec 20th SPX skew from last Monday (pre-debate, teal) vs this morning (gray). We see IV’s are down from last week, and we see a bit of a flattening in call skew (mildly bearish). Commentary seems to be that Trumps policies could be inflationary, which could increase rates and therefore be a drag equities. While we are not here to offer political analysis, rates which are increasing quickly is one of the biggest risks to equity markets. This makes monitoring these longer dated skews quite informative as we approach the election, and weigh through its potential impacts.