Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up +80bps, bringing a full reversion from yesterday’s post-FOMC decline. Equities are being fueled by a sharp decline in oil, with CL -2% to <100.

SPX dealer gamma is currently negative <=7,625 from today out until next week, suggesting price action below remains susceptible to sharp declines.

SPX vols are deflating across the surface as you can see in the day-over-day comparison below. This is a good signal for the bullish cause.

We’ve written a lot about intraday mean reversion leading to very low realized volatility in the S&P500. Yesterday was no different as the SPX touched ~7,500, only to close ~40 handles higher into the close. Structurally, this appears to be very unique behavior as chasing an intraday move has been structurally punished; the longer the horizon, the stronger the tendency for that move to wash back out.

Top chart: if markets are indeed a random walk, wed see variance at 1.0 (dashed black line). Instead we see the SPY and QQQ tent to move farther away from randomness as the day progresses – an indication that moves are reversed rather than extended.

Bottom chart: This chart compares the direction of the morning with the direction of the afternoon. Above zero means the afternoon tends to continue the morning move; below zero means the afternoon tends to reverse it. Recently the lines have fallen from strongly positive to around zero and slightly negative. That tells us morning strength is no longer reliably leading to afternoon strength as the afternoon is increasingly fading or undoing the morning move.

Normally we’d try and point to a strongly positive gamma market to bring about such mean-reverting behavior, but the market has been waffling in-and-around negative gamma. We don’t have a strong insight into why the behavior is so different, but acknowledge the impact that oil and rates (and their headline) are having on equity price action.

In this case here, the oil slide has pushed the SPX back above the ~7,600 Risk Pivot, and vols are sliding lower which opens the market up for further upside. If oil indeed stays <100 then traders are likely to start eyeing the midterm chase. Given this, we will likely look to add to Nov (post-election) upside call structures and maintain those while the SPX holds > Risk Pivot.

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