Macro Theme:

Founder’s Note:

Futures are off 10bps. CL +1% to 103.

Futures were lower overnight, but the mandatory AM bounce kicked in, to revert ES to unch. More on this idea at the bottom of the note. The TLDR is this: realized vol seems set for a spike.

The indicated overnight low was SPX 7,575, which is clearly the line of support as that same level was the low of last week. On this topic, crude touched 104 overnight, and that is a high tested 3 times in the last week.

Despite the bouncy nature off of the 7,575 to 7,600 support area, the SPX gamma picture is deteriorating. You can see that for today into Friday it is now negative gamma <=7,625, which implies that dealers will start to sell futures into a weaker tape. And, true to last week, as vols are firmer now vs a week or so ago, should the SPX drop then IV’s are going to jump and that adds vega hedging requirements onto negative gamma. We reiterate that <7,600 is fraught with risk.

On to the unusual price action.

Today marks the lowest High to Low (i.e. intraday range) SPX realized volatility (RV) since January 2020.

Many research papers have highlighted and discussed overnight drift vs intraday price action. Here we measure SPX close-to-close realized vol (“CTC”) vs open-to-close vol (“H-L”). The spread between the two is now 3rd percentile which is saying the intraday action is unusually calm relative to the overnight. We’d also suggest that equities are unusually calm relative to rates, oil, etc, too. We don’t have a massive “aha” moment related to this spread, specifically, but the intraday High-Low RV is of note given the aforementioned dynamics.

Its also of note because implied volatility measures are creeping higher, while standard 1-month realized vol is at 9% – its lowest reading since last September. The VIX vs RV spread is not at massive extremes (88th %’ile). Both of these measures all tell us that the market is due to make some moves, and between oil, FOMC, and OPEX we want to position some end-of-Sep and/or Nov (post election) positions to catch some convexity both in the short term, and into year end.

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