Macro Theme:

 

 

Founder’s Note:

Futures are flat this AM in front of jobless claims at 8:30AM and PMI at 10:00AM ET. The SPX remains perilously perched above the critical 5,500 support level, and should that be broken we would look for a large, protracted move lower.

The struggling upside faces resistance at 5,560, then 5,600.

You may recall the map below from Tuesday AM which framed yellow being a “neutral zone”, which has proven to be true as prices have waffled around the 5,500-5,500 area. This neutral zone still holds true today, as option market dynamics aren’t in place to sustain a rally unless 5,600 is recovered to the upside. The more concerning side of the equation is a break <5,500, which invokes a “gamma trap”: dealers needing to sell equities, which pushes equities lower.

The hamstringing of equity markets is in large part NVDA & the uninspired chip/AI growth story. This seems to have reduced upside/right tail concerns, as shown below in the change in 1-month skew from 1 week ago (gray) to today (teal). As you can see the relative IV move for upside strikes (i.e. calls) is lower than downside (puts). When traders were tripping over themselves to get long semi’s earlier this year, the upside was receiving higher relative IV’s. Now? Who cares. Plus, there is the interesting alternative of bonds.

While we risk wading into macro viewpoints on this, we think the possible return of “60/40” is a very interesting dynamic. Bonds have performed well into August equity drawdowns, and may be a decent alternative into uncertain times (remember in 2022/23 it was “TINA” – there is no alternative to stocks).

We also think its interesting that much of this equity downside seemed to be unlocked with the calendar flipping to September, which may have led to rebalancing. Conspiracy theorists would point out that Friday, August 30th saw the SPX close at +1 month highs…

Losing NVDA/chip leadership, and macro/rate-agnst, is forcing equity correlation higher, as shown below in COR1M. Forcing correlation higher is linked to a higher VIX, because equity correlation tends to snap higher when equities crash. Why this all matters is that things are on the cusp of getting “crash-y”, both from a negative gamma perspective (<5,500 = negative gamma “for real”), and the fact that VIX & COR1M are “warmed up”. While we do not now if the SPX takes out 5,500, we do feel strongly that more downside comes should that happen.