Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are flat ahead of bank earnings and home sales data at 10 AM EST. US10Y 5.19% from +5.3% last week.

The key positive gamma range noted the last several days remains in tact: 7,700 – 7,800. We do not think the market is poised to move much today, with CPI on deck tomorrow.

That being said, the market does have a problem: a complete lack of volatility being priced in. We want to be long of Nov options here as we think realized vol is poised to once again wake up – just as it did out of Sep OPEX.

Starting with an indexified measure of vol, VIX1D, you can see it is at a lower bound of ~7. A backtest on this shows that forward SPY returns are essentially flat. It is not a signal of an explosive pending move. With CPI and earnings afoot, we think “this time may be different”.

Stepping out farther in tenor, we see that SPX 3 month IV is also at nearly 2-year lows – this despite all of the things going on (wars, rates, elections). And while you may not agree with wanting to be long of options here, we are hard pressed to find a reason why shorting them is worth the risk-reward.

About a month ago ago, out of Sep OPEX, we had remarked that volatility was poised to break out. That seemed to come to fruition as the Nasdaq broke 6% higher into October. Then, as rates ripped higher the equity market did something odd: it stalled (recall all those MOVE vs VIX conversations). Over that same time frame, traders seem to have also shifted from a META-driven AI hope, to tech-malaise. You can see that “wedge breakout” in realized vol from the SMH chart below – and you can also see the big fade. In fact this morning SMH is down another ~1.5% as Chinese memory/chip makers are allegedly increasing production.

If the equity space loses a tech bid, some other sector clearly has to carry the bullish baton. It’s possible lower rates via a cool CPI could drive the lagging non-tech sector. TSM earnings on 10/15 is the first major tech co to report, and on that point you can see that single stocks generally carry a rich IV (left), but the call skew has faded (right) as traders sour on tech.

On the idea of shifting to other bullish vectors, you can see the put/call ratios for tech are indeed off highs (shades of red) while other, more beaten up sectors, are finding some higher relative call volumes. We’re not sure if this is simply some bottom fishing or something more substantial, but its looks like a potential transition is underway. Consider XLF – its down 10% from its Aug 1 highs while seeing call-heavy volumes – particularly as rates come off (and major earnings this AM).

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