Macro Theme:

 

 

Founder’s Note:

Key SG levels for the SPX are:

• Support: 5,570, 5,550, 5,500
• Resistance: 5,600, 5620, 5,650, 5,665

For QQQ:

• Support: 470
• Resistance: 480, 485

IWM:

• Support: 210, 200
• Resistance: 213, 215, 220

Powell speaks today at 10AM ET.

Yesterday’s AM push started over the key 5,600 strike, but closed below it. This morning we find futures indicating a retest of 5,600 for the cash open, and this level remains a key

pivot

area for today. If we can generally hold >5,600 after Powell, then we think it sets up a move to 5,700 into NVDA earnings next week (8/28). Additionally we see 5,620 as a very large positive gamma strike, with a push over that level as solidifying a view for more upside.

Should Powell upset market expectations, we look for a quick test of 5,500, which is also a very large positive gamma strike. Accordingly, we would look for a support at that area, but would have a tight stop just <5,500. The stop is because should 5,500 meaningfully break (i.e. <5,485), it would likely be a signal of several days of equity draw downs, with a VIX >20.

Additionally, this morning the VIX is at 17, implying vanna is a key driver. A dovish Powell easily drains off the linked event-vol, aiding in a shift higher in equities. Conversely, vol is far from being rich if equities start declining more that 1%. This gives room for higher IV, which would add more downside equity pressure.

Zooming out, we have been giving edge to lower equity markets this week, driven by August OPEX, wherein our statistics show 68% of the time equities reverse week over week. Meaning, last week the SPX Index was higher into OPEX, and so edge would statistically be for lower equities this week. Additionally, this week saw the end of the 4th longest streak of SPX up days in the last 30 years, at 8 consecutive days spanning +7% of upside.

Things now rest with the read on Powell at 10AM, which feeds into NVDA on Wednesday. There are a matrix of possibilities out of these two events, with “soft landing”/dovish Powell and NVDA blowout-earnings likely paving the way for higher stocks. Inside of that is a realm of possibilities, and so rather than guess, we are set to read the options data, including large zones of gamma (positive & negative) and implied vols.

Our prime concern here is not navigating upside – we will generally hold stocks as long as the SPX is > Vol Trigger (5,545), but in this case we mark 5,600 as our “risk on” strike because of the potential shift in gamma & vol around Powell. Should the market continue to rise from here, our risk off trigger points (ex: Vol Trigger) should slide higher as options positions roll, helping us to maintain risk exposure.

The downside is much trickier, and much more of a concern. While traders shrugged off the violent downside of early August, we think it exposed a very soft, illiquid underbelly to this market. Recall that on Thursday 8/1 & Friday 8/2 (before the 8/5 VIX +50 spasm) the SPX had declined by -3.5%, with the VIX moving to 20. Further, it seemed to us that traders tried to short that Friday 8/2 vol spike, and were very lucky that vol quickly mean reverted on Monday morning.

The point here is that many are in short vol trades (see SVXY AUM, below), and are likely emboldened by playing the short vol trade after the events of 8/5. This implies they will likely be out in force trying (or increasing) the same trade on any subsequent IV spikes. This means that vol should crush hard if Powell is benign, and IV’s drop. However, if we run into a sustained rate move or other cross asset volatility, those betting on vol mean reversion could find themselves quickly trapped.

This reminds us of 2017 wherein traders persistently shorted vol spikes, and that worked really well until in Feb 2018, when it didn’t. For this reason, we will be looking to short stocks and/or hold long vol positions on a break <5,500, as pain would likely be to the upside in volatility.