Futures, and key SG levels, are unchanged. Support remains at 3835, then 3800. Resistance is at 3850, then 3900. We continue to look for mean reversion on moves away from the 3835, and this should continue in through Thursday.
We see little reason to shift from our forecast for the last several weeks: a pinning in the 3835 area (12/19 note & yesterdays update). Starting Friday large forces may enter, breaking the pin.
After Dec 16th OPEX, the S&P500 has been locked to the 3835 level. The same is not true for other major indicies, as shown below. Since 12/16 OPEX the tech heavy QQQ is -4.5%, while DOW is +0.60%. While TSLA is clearly a major drag in tech (1 month return: -42%), other major tech names like AAPL(-10%), AMZN(-11.5%) are quite weak, too.
These divergences are leading to a breakdown in correlation, which is a signal that there is not much fear in this market. There are a variety of reasons for a decline in correlation, but the net result is traders want out of tech (for example) but are happy to own consumer staples, and healthcare. So, there are still stock buyers out there, they’re just being selective.
You can see the CBOE’s measure of 1 month correlation below. This correlation index measures how closely the top 50 S&P stocks are expected to track each other. Generally in bearish markets with heavy fear, correlation moves up. This makes sense as when people want to get out of stocks, they sell everything.
The general relationship can be seen in the chart, with correlation peaking as stocks make lows. However, as you can see in red, we have seen the S&P make recent lows while correlation is moving lower. This is obviously a very short term view phenomenon, but it syncs with “tech leaders” getting wrecked, while “quality” names are near all time highs (ex: MCD, MRK, KO).
A few days ago we spent some time discussing this idea that next year may test everyones notion that VIX was the “fear gauge” (vs a volatility gauge). To this point we have recently seen short burts of “VIX up/market up”. For example into the 12/12 CPI readings in which there was such a chase for upside call hedges, that the VIX moved sharply higher.
As many of you are aware, there is a large January expiration on 1/23 that is currently “put heavy”. While there are several long weeks before we approach this date, we generally view put heavy expirations as a catalyst for market rallies.
This expiration could therefore create a situation in which all stocks move higher. This means that correlation moves higher, as all stocks are moving up in sync (again note correlation historically goes up when market goes down). This further ties in with the notion of “VIX up/Market up” as traders chase calls to hedge upside risk – not downside risk.
We suspect this idea of periodic “call chasing” could be a dominant theme for next year, as investors have reduced equity allocations and therefore less demand for put options. This could keep the VIX subdued as equities grind lower, but then there are VIX spikes as traders buy long call positions to catch upside market action.
Note that we do not mean to infer that the VIX will no longer market declines. This is why we suggest that it will be seen more as a “volatility gauge” reacting to both market rallies, and declines.
| SpotGamma Proprietary SPX Levels | Latest Data | SPX Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 3829 | 3828 | 381 | 10822 | 263 |
| SG Implied 1-Day Move:: | 1.26%, | (±pts): 48.0 | VIX 1 Day Impl. Move:1.38% | ||
| SG Implied 5-Day Move: | 3.07% | 3844 (Monday Ref Price) | Range: 3726.0 | 3962.0 | ||
| SpotGamma Gamma Index™: | -0.71 | -0.71 | -0.35 | 0.01 | -0.12 |
| Volatility Trigger™: | 3830 | 3830 | 384 | 11250 | 280 |
| SpotGamma Absolute Gamma Strike: | 4000 | 4000 | 380 | 11275 | 265 |
| Gamma Notional(MM): | -408.0 | -463.0 | -1776.0 | 1.0 | -844.0 |
| Put Wall: | 3800 | 3800 | 375 | 10500 | 260 |
| Call Wall : | 3835 | 3835 | 390 | 11275 | 273 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 3890 | 3918 | 389.0 | 10659.0 | 304 |
| CP Gam Tilt: | 0.81 | 0.76 | 0.56 | 1.13 | 0.52 |
| Delta Neutral Px: | 3884 | ||||
| Net Delta(MM): | $1,337,258 | $1,415,382 | $155,837 | $35,381 | $84,299 |
| 25D Risk Reversal | -0.04 | -0.05 | -0.03 | -0.04 | -0.04 |
| Call Volume | 387,821 | 447,006 | 1,561,154 | 7,305 | 594,116 |
| Put Volume | 528,002 | 715,408 | 1,954,684 | 6,147 | 911,258 |
| Call Open Interest | 5,539,084 | 5,461,075 | 6,832,636 | 56,244 | 4,837,590 |
| Put Open Interest | 9,533,241 | 9,817,913 | 12,028,281 | 48,169 | 6,072,851 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4000, 3900, 3850, 3800] |
| SPY: [385, 382, 380, 375] |
| QQQ: [280, 270, 265, 260] |
| NDX:[12000, 11500, 11275, 11000] |
| SPX Combo (strike, %ile): [(4002.0, 83.06), (3872.0, 74.96), (3849.0, 80.7), (3837.0, 98.23), (3826.0, 82.78), (3814.0, 93.67), (3799.0, 97.42), (3795.0, 75.47), (3776.0, 89.22), (3764.0, 91.63), (3749.0, 95.64), (3714.0, 80.14), (3699.0, 96.05), (3665.0, 75.24), (3649.0, 86.04)] |
| SPY Combo: [382.16, 378.35, 368.43, 373.39, 379.87] |
| NDX Combo: [10671.0, 10877.0, 11277.0, 11082.0, 10465.0] |
