Macro Theme:

 

 

Founder’s Note:

Futures are +20bps ahead of Jobless Claims at 8:30 AM ET, and 2PM FOMC.

Support is at 5,900, then 5,885. Resistance is at 5,950, 5,975 and 6,000. As we detailed yesterday, 6,000 is the major upside target, and we think its a level that is in play, today.

On this point, our stance is long of equities while the SPX is >5,900, and neutral below that level. “Neutral” <,5900 is because the SPX currently exhibits a positive gamma position all the way down through 5800, suggesting that downside is supported (dips are likely be bought) through to that level. That being said, if Powell does deliver a hawkish message, a break of 5,900 could be more ominous as traders may elect to buy puts, which would turn gamma <5,900 negative.

In either case, our major levels are ~50 handles (~82bps) from the indicated 5,945 SPX open. Is the market worried about FOMC? Well, the 0DTE straddle is a tepid $37/or 62 bps (ref 5,940, IV 23.4%) – which we read as low.

Why low?

First, its FOMC, which is a big event. Second, consider the SPX rallied 146 handles yesterday (2.5%), and we believe there is autocorrelation in volatility (i.e. high volatility brings more volatility).

But, before we delve into post-FOMC moves…it appears Captain Condor is back, but its a “baby condor”.

There is a 3k lot 0DTE condor at:

• 5,970 x 5,975 call spread (fund is short the spread, dealer is long)
• 5,885 x 5,880 put spread (fund is short the spread, dealer is long)

This “baby condor” position has been much larger in the past (~20k contracts), and so we think its potential impact today is mitigated due to smaller size + FOMC. If the post-FOMC SPX prices are near one of these spreads we may pin that area.

Back to the FOMC, the market is at 97% odds a 25 bps cut is delivered today. However, the odds of a 25 bps Dec cut are currently 66% vs >75% a month ago. Further, the 10Y yield is up 80 bps since the Sep FOMC rate cut. The only opinion we can project on this is that it seems as if the rate market is “confused”. This, we think, allows for more potential equity volatility. (We’ve also enjoyed listening to pundits trying to walk through higher rates but rate-sensitive IWM’s yesterday putting up a blistering +5% rally vs +2% SPX/NDX).

Keep in mind: “volatility” can happen “both ways” (equity moves higher & lower).

Our feeling into elections was that equity prices wouldn’t fully release until the FOMC Conclave due to the aforementioned rate-quagmire. The Republican red-sweep certainly challenged that notion, but we suspect a “benign” FOMC will allow for another volley up upside equity attack…

Despite the uncertain rate environment, equity vol was smoked immediately after the election, as you can see via the 6 vol pt drop in SPX term structure, below (gray = 11/5, teal = this AM). This reads like traders treating FOMC as a “speed bump” on the way to SPX >6,000.

The point here is, as we discussed yesterday, we think the equity market could be going through a phase of “prepricing” upside which could suggest that the rally through November is stronger than some anticipate. Quite frankly we see no reason to forecast a change in this stance until/unless the SPX moves into a negative gamma position (in this case <5,900).