Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are +75bps after Friday’s sharp decline.

TLDR: We want to be long as a trade here if SPX is >6,260. If 6,260 support gives way, we look for a test of 6,200. If the SPX closes >6,300, we return to a core “risk on” long position.

Both bulls and bears were out making their case over the weekend, with ISM PMI coming in tomorrow AM as the prime data point this week – and little else from that.

Before projecting forward, its important to remind everyone that the period heading into FOMC was extremely low vol, with 1-month SPX realized vol at its lower bound (~6%) and forward vols pricing in very little movement. The sell off narrative is that Powell came in a bit more aggressive than expected, and poor NFP data served to trigger a sharp 3% correction from Thursdays opening highs.

Narratives aside, when the market is pricing in no movement, and it starts to get more movement than expected, it can increase or cause jumps in volatility, as those that were short vols at <10% IV have to cover.

With that, the VIX very quickly jumped to 20, and we saw short dated vols push toward 15-17%.

What VIX 20 tells us is essentially that puts went from very cheap pre-FOMC, to fairly expensive. Should the equity market not have another 1% drawdown today, then those freshly-bought puts will be down sharply, which adds fuel to a bounce.

While its only 5AM, we see equity futures +70bps, and SPX IV changes somewhat mixed. This weeks vols are higher than Friday’s close, with >=this week flat to down 1/2 a point into the 14%’s…and 1-month ATM SPX IV at in the 14%’s “ain’t panic”.

Our read here is that if the rally can hold >=6,260 until after the open, 6,300 is the first obvious line of resistance and a close >6,300 pushes us back into “risk on” territory. Helping bulls is that shorter dated IV’s now have a bit more premium to sell, and the contraction in longer dated IV’s from Friday’s close signals major hedging flows are not coming in. If we fail to close >6,300 then our concern here is that the rally is just an oversold bounce, and as such equities are more exposed to future declines.

Should the AM open be weak, should 6,260 be lost then we likely test 6,200.

The only main puts added on Friday were traders buying a slug of 6,200 to 6,150 puts, which would add negative gamma flows into that zone. Below there positions are fairly unchanged from Friday, again backing the idea that longer dated hedging flows were quiet despite the equity drawdown.

This overall small put position change highlights a core point we thought about over the weekend: There have been several times in the past that bouts of equity weakness have led us to sound the risk-alarm as we saw high volatility potential in positioning. Here we’ve just not saw that sharp, risk-inducing, dealer short put position either into Friday’s close nor into todays open. The main risk into last week was the very low levels of volatility – but that has seemingly corrected. Vols can certainly go higher from here, but this weeks lack of real data seems like more of an opportunity for the 0DTE crew to “short vol”.