SPX has fallen into short-gamma territory. Short-term support at 4048.00 may provide a bounce, but it remains on a sell signal beneath 4120.00. Buckle up for the ride.
The NYSE Hi-Lo Index opened at -11.00 and has declined to -44.00, confirming the sell signal.
SPX futures retraced to an overnight high of 4144.40 before losing its momentum. It is likely that the move was a mechanical reaction to dealers and hedge funds unloading their shorts needed to cover yesterday’s op-ex. SPX is caught in a trading range from 4075.00 to 4175.00, looking for a way out. Last Friday’s high remains in a countdown to the week of June 20 in the current Master Cycle. It is possible that this morning may bring a final resolution, since 4.3 market days from the high will have elapsed near 11:00 am, leaving a probable 8.6 market days to the low.
Options buyers appear to be narrowing the range, with 4110.00 being Max Pain and 1063 call contracts at 4115.00 due to expire today. However, calls dominate above 4150.00 and long gamma starting at 4175.00. Puts dominate at 4100.00 and below with short gamma beginning at 4075.00. Thus, long and short gamma are bracketing the trading range.
ZeroHedge reports, “US index futures turned positive on Thursday, even as European stock slipped ahead of the ECB decision at 745am ET, with Nasdaq 100 contracts outperforming as oil prices and bond yields stabilized and strategists at Goldman and JPMorgan gave more bullish comments on equities. Sentiment was boosted after Bloomberg reported that China’s crackdown on internet companies may be easing with a revival of the Ant Group IPO, which boosted the country’s US-traded stocks (the news was since refuted by China, but moments later Reuters re-reported what Bloomberg said). S&P 500 futures traded 22 points or 0.5% higher, and Nasdaq 100 futs were 0.4% higher. The dollar slid, and 10Y rates were flat at 3.02%.
Markets remain fixated on the risk that central banks intent on cooling inflation snuff out economic recoveries in the process. Money markets have priced in 36.5 basis points of tightening to the ECB’s rate by next month’s meeting, just short of a 50% chance of a half-a-percentage point increase, which would be the first since 2000.”
VIX futures dipped to an overnight low of 23.82, then began a recovery into positive territory. Yesterday’s low at 23.74 occurred on day 261 of the Master Cycle. It is overdue for a reversal.
Next Wednesday’s op-ex is massively covered with puts ranging up to 27.00. Calls dominate at 28.00 and higher. This is a market due to catch the vast majority of investors wrong-sided. No one seems to be buying protection, except yours truly.
The NYSE Hi-Lo Index made a high of 115.00, but closed at 40.00.
ZeroHedge observes, “Following The ECB’s statement, traders have moved rate-hike expectations up to around 150bps by December 2022…
All eyes will now be on what Lagarde says at the press conference as she tries to thread a needle of a fragmenting European bond market, ending bond-buying, and hiking rates into her own stagflationary forecast (lower growth and higher inflation). As Bloomberg Economics’ Geoff King points out:
“The most closely scrutinized part of the press conference will be any comments made by Lagarde on the likelihood of a 50 bp interest rate increase instead of a 25 bp move. She has published a roadmap for her preferred course of action and it’s consistent with 25 bp increases in July and September. We don’t expect her message to differ, but she’s changed tack before after inflation surpassed expectations.”
TNX is rising this morning, approaching the Cycle Top resistance at 31.18. However, it may be due for a pullback to the 50-day Moving Average at 28.14 or possibly lower. It is yet unclear how much influence an equities sell-off will have on rates. The current Master Cycle ends in 30 days and may target mid-Cycle support.
Yesterday, ZeroHedge reported, “Heading into today’s 10Y auction, one day after yesterday’s mediocre, tailing 3Y and with yields moving back higher after yesterday’s slump, JPMorgan’s rates strategists said that they expected the $33bn auction to be digest smoothly, “given the sector looks rich, has seen a strong move higher in yield, and that the auction size is smaller in size.” They were right, more or less.
Pricing at a high yield of 3.03%, today’s 9-Year, 11-Month repoening of CUSIP EP2 priced at a high yield of 3.030%, rising by 9bps from last month’s 2.943%, the highest since Nov 2018, and tailing the When Issued 3.018 by 1.2bps. The tail, which was somewhat unexpected since there was a generous concession into today’s auction, was the 4th consecutive tail for the 10Y which has seen just one stop through in the past 8 auctions (in Feb 2022).”
USD futures have declined to a morning low of 102.15. There is about a week left to end the current Master Cycle. There may be a retest of the Cycle Top resistance at 103.69.