Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are +20bps higher ahead of CPI.

SPX positive gamma sits in a band from 7,500 – 7,700, with negative gamma below. If CPI is benign, we’d expect a swift move to 7,800 which would shift all eyes to the 8k strike if tomorrow’s PPI is calm. There are apparently other flows which could help to push equities higher, too (more below). We continue to hold the short dated call flies to play this, and if CPI is good we would look to add lotto flies for a Aug OPEX 8k move.

To the downside, its nuanced. Yes, below is some positive gamma (~70th %’ile in size) which implies support. But the vol complex is not ready for any type of a downside move, and we’d think that vol and vega (including correlation unwinds etc) would wash over the positive gamma below. We did add small lots >=1-month put spreads yesterday per our Note, and would look to press shorts if SPX <7,680.

A Bloomberg article is making the rounds that CTAs are massively short bonds, and so any downtick in rates could lead to a sharp bid:

• CTAs (trend-chasing/trend-following funds) tripled their underweight/short positions in global bonds by the end of July (from two weeks earlier).
• This is described as a record short exposure (largest short on 10-year bonds in UBS’s dataset, which goes back to 1990).
• Sensitivity: roughly $300 million P&L impact for CTAs per 1 bp move in the 10-year Treasury yield (ahead of the then-upcoming US CPI/PPI data).

You can see similar positioning in the TLT fixed strike vols. This is set to stats-mode, with a 90-day lookback. TLT ATM vol is particularly high (green), with downside strikes at their highs. Conversely, it reads like the call side is being sold hard (red) – that could go bid if rates come down. We’d think a bond short unwind would in turn jack up equities.

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