Macro Theme:

 

 

Founder’s Note:

Key SG levels for the SPX are:

• Support: 5,300
• Resistance: 5,320, 5,350, 5,375, 5,400

For QQQ:

• Support: 450
• Resistance: 460, 463

IWM:

• Support: 200, 190
• Resistance: 210, 216

TLDR: We anticipate a relatively tighter trading range today (<1% market move), as today is the last day of “free play” for 0DTE traders. Starting Tuesday, every day this week carries a significant data point which carries a vol premium. For today, 5,300 is support, with resistance at 5,375 & 5,400.

5,400 should be a strong resistance point into tomorrow’s CPI, and we currently give edge to that level being a major high into Friday’s OPEX.

Should we break <5,300 at any point this week, we flip back to “risk-off” and look for a quick test of 5,200.

Equities markets were finally able to hold their bid on Friday, with the SPX closing at 5,344. This was aided a slide lower in volatility, as represented by the VIX dropping to 1-week lows of 20 from Monday’s highs over 60.

SPX 5,350 & VIX 20 was where these indexes were on Friday August 2nd, and so these current levels represent the full circle of the vol fade/price mean reversion from last weekends massive market spasms.

Now price is about what we have in front of us, which is a lot of data tied to data-driven volatility premium (i.e. “event vol”). You can see the events listed in the SPX term structure plot below, and it starts tomorrow with PPI, then 8/14 CPI, 8/15 Retail Sales, & 8/16 OPEX. That gives way to Jackson Hole on 8/24. Also note the SPX term structure (teal) remains high, but has now normalized as it returns to the top of its 90-day range (gray shaded area).

Should this weeks data pass without incident the term structure should continue to deflate, but a decent premium likely holds into Jackson Hole.

The significance of last week is that we think the dominant “correlation trade” subsides as traders focus less on “which stock(s)/sectors are going lead”, and more on “should we own stocks vs bonds/cash”. This is because the market is forecasting a 100% chance of a Sep rate cut, with a 50/50 chance of either a 25 bps cut or 50 bps cut.

Remember it was the cool CPI & shift to “guaranteed cuts” that sparked the surge into small caps on 7/11. This surge into small caps came a the expense of semis & Mag 7, leading to IWM trading higher and SPY/QQQ down (i.e. negative correlation).

Given the 50/50 chance, traders are going to be picking apart the next 2 weeks of data in an attempt to forecast target rates from on FOMC 9/18.

This all leaves us in a rather complicated place, for which we don’t envy macro forecasters. Lower inflation is good for small caps, but evidence of a recession seems to be increasing – probably not good for small caps. This may also be the last few weeks to yields at these higher rates.

This is all further complicated by NVDA earnings on 8/27, which should stamp the near future of the “AI trade” which provided so much bullish momentum over the past year.

From our chair the key “risk off” levels have served as fantastic downside signals, and should continue to do so going forward. We view the options market as the “sum of all fears”, as an increase in hedging being the manifestation of forward views. There becomes a point wherein the sum of those fears is enough to tip equity markets to the downside – and flag the “all clear” to the upside.

Currently that risk-off tipping point remains 5,300, and we will shift this level when positions warrant a change.