Macro Theme:

 

 

Founder’s Note:

Key SG levels for the SPX are:

• Support: 5,500, 5,500
• Resistance: 5,565, 5,600

For QQQ:

• Support: 470
• Resistance: 480

IWM:

• Support: 210, 200
• Resistance: 213, 220

Futures are again higher this morning, First resistance is at 5,625, then 5,650 & 5,700. Support is at 5,600, then 5,565. Due to high positive gamma, equities should have decent support below, as we don’t see material negative gamma until <5,500.

The length and magnitude of this rally is truly remarkable. It has a linear quality to its slope, which invokes the idea of massive buy algorithms (ex: CTA’s, vol control, buybacks, etc) starting on the market open, and working until the markets close.

This statement about the incredible size of of this rally isn’t just opinion.

We went back to 1994 and calculated the longest streaks of positive daily returns for the SPX. The current streak stands at 8 days, with a return of 7.6%. Only 3 times in 30 years have we had longer streaks, and the maximum return for those streaks was 6.35%. So there is indeed some type of “buy function” at work here that likely stands aside from options flows.

From our seat, as the market has rolled higher, the options positions have been moving with it (i.e. rolling up in strike). We now have a meaningful amount of positive gamma built up at 5,660 which informs us there are now large customer short calls into this 5,660 strike region (giving dealers positive gamma). This should spark some resistance, which is interesting as it lines up with a large VIX expiration tomorrow AM.

We make this “resistance” statement acknowledging that we starting looking for a market reversal on Friday’s close, due to the statistics supporting OPEX SPX price reversals (68% of the time the SPX reverses after OPEX, see y’days note).

On this VIX point, today is the last day that Aug 21 VIX options can trade, and we’ve seen this day prior to VIX exp, as well as VIX expiration day, be impactful to S&P500 options prices. You can see this back in July, wherein the VIX expiration marked a relative high in SPX prices.

Our new beta model shows market makers are generally short VIX gamma from 17 – 20 strikes, and long gamma at the 15 strike. 15 is the largest strike on the board, which is mainly puts. We think that on net this flow provides pressure to keep VIX/vol down, and the clearing of these positions may allow for VIX to rise. We are not suggesting this VIX expiration is going to trigger a major, sustained drawdown in equities – that would require bearish readings from Powell on Saturday. We are, though, in the camp that this is rally is “too much, too fast”.