Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are 20bps higher, leaving the SPX to contend with Captain Condor at 6,350. Support is at 6,300 which is reinforced by the same 0DTE condor position.

About 2 weeks ago we started into this same price zone >6,300 to <6,400. Price action through this zone was a grind with SPX realized vols dropping to ~6%, and we had been talking about this idea of a “zombie market”. The way to play this zombie market, we thought, was to look for single stock/sectors to outperform the S&P500 as the S&P may pin and grind due to hedging dynamics.

While that view came under heavy pressure due to the Thursday/Friday vol spasm, its now back in favor given the SPX close >6,300. Further, we will continue to favor the above view while the SPX remains generally above our ~Vol Trigger level (currently 6,315). This is because of the general idea that when the SPX is >Vol Trigger price is supported by hedging flows, and volatility is suppressed. Its price support/vol suppression that creates the “zombie”, a market which just marches slowly forward (but higher).

This is our base case here, and accordingly we maintain SMH call positions (due to cheaper relative call IV), and will look to get back into a “sliver of puts” and/or VIX calls if we see the SPX IV’s creep back near 10%.

Today on the docket is ISM PMI at 10AM ET, and should that pass without issue we think vols will contract a bit more, and then there does not appear to be any major data for until 8/12 CPI. That ~1 week of “no data” may signal that short dated traders will step up and sell options, which should support stocks. If we look further out at vols, we see 1-month skew is essentially back to where it was last week, before FOMC. If the market is now getting more comfortable with rate cuts ahead, then one could argue that vols may decline even further post-CPI and into Jackson Hole at end-of-August.