Macro Theme:

 

 

Founder’s Note:

Futures are +30bps heading in to todays shortened session.

We remain bullish on equities if the SPX holds >6,000, with an overhead target of 6,050. Vol remains at recent lows, as shown by the VIX <14 – there isnt much perceived risk out there.

The latest GEX models show that if the SPX can slide >=6,050, it is going to be met with MASSIVE positive gamma support. Further, that support likely doesn’t dissolve until the end of December, suggesting that bears would need something quite legitimate to push equities lower. This large positive gamma should lean on realized volatility, which legitimizes fresh lows in implied volatility. Seems safe, but boring.

There remains a large performance dispersion across indices, with the “exciting” Dow and small caps sharply outperforming tech.

This dispersion exists in volatility levels, too, with IWM’s current IV Rank at 20% vs DIA 12% and just 2 %(!) for SPY, and 4% for QQQ.

This highlights a critical juncture here for SPX at 6,000. While its hard to think of a reason for a sustained vol pop in SPY/QQQ, we find it really hard to want to short an IV rank of 2, as just a small new risk trigger could invoke an asymmetric vol response if the SPX is <=6,000. However, >=6,050, we’d estimate a “risk off” trigger would have to be quite a bit larger due to overcome the vol-crushing positive gamma.

Additionally, assuming equities maintain their bullish stance into year end, its becoming clear that the DIA/IWM may continue outperformance, as suggested in their higher IV’s. There is a “macro” idea behind this – possibly that DIA/IWM are more “pro Trump” but more concrete is the idea that DIA & IWM do not have giant, systematic all selling complexes a la S&P500 and NDX. Those giant SPX/NDX call selling funds are the suppliers of this huge positive gamma. That huge positive gamma should throttle volatility (movement up or down) – turning bull moves into relative grinds.

With that, we note that our key way to express equity upside out of NVDA earnings was SMH & QQQ, but those assets have been duds. Maybe it is due the tariff threats, or just uninspiring AI earnings – the narrative is not important. What is more critical here is to recognize where the options are bid – in this case IWM & DIA.

On this case we present our beta GEX for IWM, which shows dealers in a negative gamma position – suggesting dealer flows should expand volatility. That’s great if we continue to rally, and implies there may be some interesting spread trades at hand (shorting SPY + long IWM).