Macro Theme:

Key dates ahead:

Futures are +50bps higher, pressing the SPX to 6,100.

AAPL is +3.8% to $246 after earnings.

Resistance: 6,120, 6,150, 6,200

Support: 6,050, 6,020, 6,000

With the SPX tagging 6,100 this AM, our sights set on 6,120 – 6,150 as the next major high. A move over 6,100 is significant, as it implies that longer term (and therefore more stable) positive gamma is invoked. You can see this in our base gamma curve below, wherein absolute positive gamma (supplied by total calls) peaks into 6,200. This, vs the transient 0DTE contracts that have been supplying the bulk of positive gamma.

To sum it up, this positioning likely leads to a decline in realized volatility, which further supports SPX prices. It also likely means that vol is actually going to decline, which we flagged yesterday as not having yet happened.

Our gut here is that we are about to enter into a “blow off” top.

Lets review:

“StarGate” led to an AI chase last week, and that bubble was violently popped by the DeepSeek news. However, we believe (and the evidence shows) that the violent drop on Monday was a function of the extreme overbought conditions into Friday (i.e. huge call buyers got stuffed hard + leveraged ETF unwind).

You can see on the bottom left Monday’s (1/27) nasty -16% decline in NVDA, and correlated ~3% drop in QQQ, followed by the sizable rebound on Tuesday (top right, 1/28). The argument here is that equities can now “leave NVDA behind”.

The 1-year correlation between NVDA & QQQ is 74, as NVDA is a top 3 weight in the SPY/QQQ. Compare this to TSLA or AAPL, which have correlations near of 50. The idea is that NVDA may simply become part of the pack, as opposed to the leader.

On this point, now that the dust has settled, traders appear to be seeing DeepSeek as an “NVDA problem” and not a “market problem”. Plus, yields are very quiet after Powell, which is an “all clear” for short term buyers. With that, SPY & QQQ are within earshot of all time highs. The DeepSeek spasm did create a dip in non-NVDA stuff to buy, and so now we are seeing that buying translate into upside momentum.

Look at the 1-week performance of DIA & IWM, wherein NVDA & chips are not really a factor – DIA barely went negative on Monday.

This creates a “musical chairs” problem.

Shown here is COR1M – the CBOE correlation metric. It models the correlation between 1-month IV’s in the top 50 US stocks vs the SPX IV. When it declines sharply, we see it as a signal that bubble conditions are forming.

This was a huge point of discussion in July ’24, as NVDA and the chip sector freaked out to the upside. That led to this correlation metric breaking 2017 lows and setting the stage for the August VIX explosion (see our OPEX video from July on this topic).

As you can see, this correlation metric is back below 2017 lows. We reference 2017 as it contained the lowest realized volatility (RV) ever in the SPX of ~3.5% (1-month RV). Additionally, this COR1M metric never came close to those 2017 lows until July ’24.

Today’s 1-month RV at 14%, is much higher than 2017, but the fact that COR1M is lower (near record lows) given the higher RV (and recent market drop) is interesting. One would expect correlation to snap higher into a major selloff, but again, this is a rotation so correlation is instead plunging to lows.

The idea here is that these correlation lows are signal of bullish impulses – impulses that generally conclude with a sharp equity correction which results in all equities selling off, and correlation snapping higher. There is no set trigger for this to happen, and until it happens equities can rock higher (thus the “musical chairs” reference).

We quickly compared COR1M to the SPX (purple) below, and you can see that on approach of 2017 lows (black dotted line) the SPX seems to respond with a sharp drop. You can even see this happened at the start of Jan, when NVDA tagged 150 into the CES conference off the back of massive call trading.

The summary here is that we have our toe in the bullish waters, trying to ride the wave while aware that a bubble can be blowing. As we stated at the top, we appear to be setting the stage for that final move which could give a final over-valuation to call prices (and skew) which would be a “blow off” confirmation.

From our chair, the near term catalysts are NVDA earnings + Feb OPEX, but we will also be wary of macro prints like NFP (2/7) or CPI (2/12).