Macro Theme:

 

 

Founder’s Note:

ES & NQ futures are both +10bps to 5,690 & 20,615, respectively.

Key SG levels for the SPX are:

• Support: 5,665, 5,650, 5,632
• Resistance: 5,676, 5,688, 5,700
• 1 Day Implied Range: 0.56%

For QQQ:

• Support: 496, 490
• Resistance: 500

IWM:

• Support: 210, 206, 200
• Resistance: 220, 223

Retail sales 8:30 AM ET.

Futures are flat after the SPX rejected the SPY 565

Call Wall,

and bounced off of SPY 560 support. These major levels remain in place for today, and we look for them to start to weaken from Wednesday’s VIX OPEX to Friday’s equity OPEX. The weakening of these levels allow for the S&P to shift out of this 5,600-5,665 range with upcoming OPEX. Generally we’d look for the range to hold until Friday, but with much less conviction due to positions beginning to shift with VIX exp, tomorrow.

We note the QQQ

Call Wall

has retracted to 500, which is a likely high into Friday. SPY

Call Wall

, which was as noted above just tested, remains at 565. These are both neutral to slightly bearish developments and suggest that ranges are tightening up into OPEX (i.e. a breakout higher scenario may be on pause).

Zooming out, the current gamma-landscape looks like the following:

• Major positive gamma in the 5,665-5,700 range, which should offer sticky resistance in through OPEX. If/when the

  Call Wall

  (s) roll higher, we would adjust our range higher, too.

• 5,600-5,665 is our fair value “neutral zone”, wherein we favor playing short term mean reversion (a la yesterday’s price action, where price feeds back into 5,620 (SPY 560)
• <5,600 we are “risk-off” and looking for at least a test of 5,550, but more like a test of 5,500. We are favoring this scenario into Friday and through early next week.
• We see 5,500 as large, long term support. If we break below that level we believe its the start of a longer term bear move which could extend through to August OPEX.

In yesterday’s Member Q&A we put forth a few ideas around a concept we are calling “Correlation Spasms” (watch here), which link together many of the higher level concepts we’ve been discussing. Namely: correlation & volatility suppression.

The core idea is that we may be seeing the unwind of record low correlation with the rally in small caps/equal weight S&P500. Bulls see this as the “broadening out” of the equity rally, which is a healthy sign. We posit that this broadening out will be initially painful for QQQ & the S&P because the top 3-4 names in those indexes are 20-25% of the index themselves. Therefore those top 3 names (AAPL, NVDA, MSFT) drawing down will keep relative pressure on the QQQ/SPY until they fall more in line.

The presentation is packed with all sorts of metrics which better explain this idea.

“What’s the trade?” may look like this idea: shorting the SPY and long equal weight RSP. As you can see below since last weeks cool CPI the equal weight RSP (blue) & IWM (purple) is significantly outperforming the SPY (candles) & QQQ (yellow). Obviously one week of outperformance does not equal a trend, but we think if a market drawdown was to occur through OPEX, the SPY would have a larger drawdown relative to the RSP due to those very concentrated names weighing on SPY.

The risk in this trade is with chip sector/AI related earnings – obviously if the semis blow out numbers then the record correlation may hold. On this point we have ASML ER tomorrow, and TSM on Thursday. Recall that TSM’s revenue report from last week lifted NVDA & AAPL (TSM is a massive supplier to those co’s), which we believe sparked an “upside correlation spasm” last Wednesday.