Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are up 20bps after yesterday’s 1.6% decline. There is some jobs data out at 8:30 AM ET.

The unsettling thing about yesterday’s decline was the liquidity hole that appeared, allowing for an 80 handle drop in 30 mins. Last night we ranted about this in an early PM Founder’s Note – the takeaway is that this market is very unstable. That feels great when its a +20% rip over the last month – which we’d argue is a “feature” of the instability. Does that mean you have to be a perma-bear? Nope. Does it mean you need to respect the tails? Yup.

You can watch here for a breakdown of the liquidity/volatility relationship – the main problem being that implied vol isn’t/hasn’t been accounting for the jump risk of diminished liquidity. In fact, we’ve been arguing it hasn’t been pricing in any risk at all (i.e. negative risk premium).

Before we circe back on vol, today we see positive gamma filling in overhead in the 5,860 – 5,900 area. This combines with our two large positive gamma “bull/bear

pivot

strikes” at 5,905 and 5,925. If SPX recovers >=5,905 we will likely look to express some longs. We’d read this as 5,900 is “doable” for today – thats about 1% of upside.

Below current trading levels (~5,850), we see no positive gamma until 5,775. In that area are a series of small, but positive gamma strikes, which may offer some support. To be clear – that is 1.5% lower from here.

At this point, you’re probably asking “What’s the 0DTE straddle priced at”? $40/68bps/26% IV. This 0DTE market ain’t scared – even though yesterday was a 1.6% decline.

While that 0DTE straddle seems asleep at the wheel, there is definitely a bid to longer dated vol, as non-0DTE traders were spooked from yesterday’s drawdown. We can see this in the skew change of SPX 6/20 exp, where not only is the whole skew higher (teal line above Tuesday night gray line), but the put wing has increased more than at the money.

Maybe this whole thing was just a flash in the pan – an over reaction – and there is nothing more to fear. We’re certainly not rates/macro guys, and won’t offer anything on those dynamics.

But here is something interesting – we went back 4 years (most our vendor API let us at this moment) to look at the relationship between TLT and SPY. Yesterday was quite an outlier as you can see, with TLT -1.7% and SPY -1.6%.

Despite that scary look, the forward 5 day SPY returns after TLT declines generally inconclusive to slightly favorable – but there are a few equity left tails in there…We ran a similar study with KRE (-3.5% y’day) and saw similar SPY return patterns. In other words – there are some equity tails in there but its not always an equity death warrant. However, as you can see in the plot above, the last 5 days were pretty calm for TLT and so the concern here is that this may be the onset to a problem (which is occurring after equities had a 20% rally and SPY call skews were 80th percentile highs).

While those return relationships may not stoke fears, what does seem to be a problem is the TLT vol. In fact, the CBOE produces a TLT VIX (candles) and its “bid”. The problem here, as we understand it, is there is no immediate solution to taking the pressure off of the long end.

Regardless, if rates are the thing that matters, the TLT term structure seems to highlight 5/30 and 6/6 as big dates ahead. These expirations seem to come just after GDP/PCE & ISM/NFP data points – but there could be some auctions or other info embedded in there, too. TLT only has weekly expirations so its hard to pinpoint the exact data that matters – but we’ll be keeping an eye on TLT vols as a bond/risk proxy.

Admin note: for those of you looking to go on “auction watch”, you can see the auctions on our event calendar, just set the “impact” (top right icon) to “low”.