Good Morning,
- After last Friday's monthly options expiration, we saw a significant amount of dealer gamma removed from the market. However, market makers are still broadly short gamma, which suggests that higher volatility should be expected in the near term. Last week, we saw most of this volatility contained to both the intraday and after-hours price action, while the close-to-close volatility remained flatter than we had expected.
- From a broader positioning standpoint, that was actually a more favorable outcome because systematic strategies typically rely on realized volatility as their toggle for equity exposure. Outside of CTA funds, that means there was less selling taking place in the background, which likely helped prevent the recent weakness in SPX from turning into a more significant event.
- In fact, if you look at our MBAD indicator below, you'll notice that last Friday's decline was really just driven by a handful of stocks, while the broader in was strong. This is NOT the type of breadth typically observed during a systematic deleveraging event, where widespread selling occurs as money rapidly flows out of S&P 500-linked products, like futures and ETFs.
- For today, there remains limited room towards the downside with our lower band suggesting support around the 4930 strike. However, even after last Friday's expiration, the 5000 strike remains the key level to watch, as we view the more tactical trading range as lying between the 4950 and 5050 strikes, which represents a spread of approximately 2%.
- Given that SPX has had a negative print for six consecutive days, we're biased for near-term strength, as longer stretches have been quite rare. In fact, over the past 30 years, there have only been seven instances where the index has posted negative returns for more than six days in a row, with the last occurrence taking place in 2020.
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-Tier1 Alpha
