Macro Theme:

 

 

Founder’s Note:

Key SG levels for the SPX are:

• Support: 5,200, 5,100, 5,000
• Resistance: 5,250, 5,260, 5,300

For QQQ:

• Support: 440

  Put Wall

• Resistance: 450, 460, 465, 475

IWM:

• Support: 200
• Resistance: 210

US equity futures +1% & Japan ripping 10% higher (halted limit-up!).

The last few days has been about people were shoved out of long-held trades, which forced an outsized jump in volatility. While we are now normalizing, there are likely to be some small after-shocks.

As our X-acquaintance “808” succinctly stated: “it’s not about the news it’s about the positioning!”.

There were a lot of positions shifts, all outlined below. Before that, we wanted to cut to the chase with the key positioning/levels:

• We flip back to a bullish “risk on” stance with a close back above 5,315. This is due to partly to the onset of light positive gamma, backed by the assumed decline in implied vols (i.e. vanna fuel) that would come with a rally to 5,300.
• A move under 5,200 places the market back into a jumpy “risk off” position, with 5,000 material, long term support. We favor a test <5,100 before 8/16 OPEX.

As we detailed last night & in our Member Q&A’s, yesterday was dominated by put selling. You can see this in the plot below of

HIRO

for the S&P500 equities, with the put line trending higher (blue). This implies that puts were being sold, most heavily in the AM when vols were at their peak, and prices at their lows. Those were nice put sales.

We also note a heavy does of SPX 0DTE call buying at those AM lows. These factors combined to give equities a big lift off of the open.

The result here was that there were a lot of positions shifts, which generally led to the reduction of negative gamma. This was driven by those puts being closed, and a lack of material call activity.

Specifically we saw large chunks of puts from 5,450 down to 4,000 closed, heavily concentrated in the August 16th & 30th expirations. Despite this closing, we saw put open interest net added as traders rolled positions down in strike and out in time. This means that there is now more negative gamma <4,900, which is not a problem if we are up >5,000.

There was a decent amount of short dated call activity, mostly what we read as smaller lot “punters” betting on quick equity mean reversion into 5,300. This lack of “big money”, longer dated call activity makes sense, as longer dated calls may be particularly rich given the elevated IV’s.

The issue here for equity bulls is that we need a catalyst. There is the lurking risk of geopolitical issues, and recessionary data.

Traders are focused on rate cuts ahead, which places the dynamic of equity vs bond allocations to the front of the table, i.e. a rotation out of equities. Heading into July it was about “which equity sector should we own”, i.e. a rotation inside of equity space (ex: semis to small caps) while rates were fairly stable.

Stated another way: the correlation trade which dominated 2024, is likely dead, and traders are looking for a new theme.

Another issues for bulls is that implied vol may not have a chance to fully release lower, due to the aforementioned geopolitical situation(s) and the upcoming election.

Additionally, banks VAR (portfolio risk) models are likely now pricing in higher levels of volatility due to the spasms from the last few days, making traders likely having to carry a bit more protection.

As a result, we continue to watch 8/16 OPEX as a place to clear out a lot of put protection. This would offer a brief respite before traders turn to Jackson Hole on 8/22-8/24 & NVDA earnings on 8/27.