1:25 pm
SPX is deep into short gamma, thanks to the 0DTE traders. This morning I mentioned a put wall at 4260.00. It had over 3200 put contracts. Now another put wall at 4250.00 with 5961 put contracts is being breached. Short gamma is strong down to 4200.00, with the 200-day Moving Average at 4196.00 as a possible support, with a 4335.00 upside potential on the bounce.
ZeroHedge remarks, “As we have discussed many times before (here and here for example), the $16 billion JPMorgan Hedged Equity Fund (JHEQX) often has an impact into quarter-end options-expirations as the strategy rolls thousands of put contracts.
Typically, there is some ‘pinning’ trend action as the large gamma draws the market towards the put strikes as dealers are forced to sell the market (delta hedge) to bring their books back to neutral as the options time to maturity looms.
As Bloomberg notes, the fund’s derivatives position consists of a put-spread collar that involves buying puts as well as selling bullish calls and even more-bearish puts. At the end of each quarter these positions are often rolled over without incident.
Yet the market is particularly susceptible to influence when the S&P 500’s trading level approaches the strike price of any of the legs of the trade around the time of expiry.
This time, however, is a little different because the market environment is extremely gamma negative (as we noted previously, the most negative gamma ever according to Goldman Sachs).”
9:52 am
BKX may offer a weak bounce in the next day or two. However, bad news is coming hard and fast in the Bank sector. A repeat of the March decline is coming, and it is likely to be worse. Enjoy the “calm” during the rest of October, since all hell is about to break loose in October. The Head & Shoulders target is a likely scenario.
8:15 am
Good Morning!
SPX futures rose to 4296.90 this morning in a short-term bounce. The bounce may take the SPX as high as 4320.00-4340.00 in a retest of the Head & Shoulders neckline in the next few days, easing the month-end losses. Be aware that there is much more downside ahead.
Today’s options expiration shows Maximum investor pain at 4300.00. Long gamma may begin at 4310.00, while short gamma gains momentum beneath 4300.00 with a put wall at 4260.00. As usual, 0DTE traders may push these levels higher or lower.
ZeroHedge reports, “After Tuesday’s sharp rout, US equity futures are higher despite another slump in Asian markets and mixed European bourses, potentially setting up a relief rally as yields are lower with 10Y under 4.50% even as investors keep a close eye on the risk of a government shutdown and the Dollar keeps rising to the point where another Plaza Accord may be required.
As of 7:45am ET, S&P futures were 0.4% higher while Nasdaq futures rose 0.3%; on Tuesday the DJIA fell below its 200-day moving average, a technical signal that suggests the index has become oversold while the VIX retreated after hitting its highest level since May. Commodities are mostly higher with WTI back above $91, leading Energy. Today’s macro data focus is on durable goods and the 5Y Treasury auction ($49bn). Tomorrow we resume with Fed speakers and Friday’s PCE/Consumption data are the most impactful data points of the week.”
VIX futures are testing the trendline at 18.20. The correction may continue through month-end. The standard correction low may be the 50-day Moving Average at 15.07.
ZeroHedge observes, “and it’s gone
SPX’s must hold area, around 4360, is gone. We are below the longer term trend line. Why not try the 200 day moving average, only 100 points lower from here…”
ZeroHedge explains the bounce, “Max short gamma
Dealers are in deep short gamma land. GS notes: “Dealers are short $2.51bn of SPX gamma, the lowest level on record, and continue to get shorter on a sell off. ”
Source: GS
Volatility control selling could be big
Tier1Alpha says that volatility control funds will have serious size to sell if we go down a little more. “Pay close attention if markets start to move beyond that, with between $25- $30 billion in selling flow hitting the tape on a 2% return.”
ZeroHedge advises, “VIX perfection
The current sub 13 low in VIX was perfect, at least looking at it from a seasonality point of view. VIX is up around 45% from recent lows, which is a lot. Chasing VIX protection here is a late trade.
TNX is pulling back from a Master Cycle high made yesterday, as the sell-off in stocks precipitated a knee-jerk flight into bonds. The correction may last approximately three weeks with a downside target being either the 50-day Moving Average at 41.66 or the trendline near 41.00. This may give the appearance of lower interest rates to come, but the trend is higher and longer than most would expect leaving the Fed powerless to reverse the process.
ZeroHedge remarks, “We recently wrote The Lag Effect Unveiled to appreciate why it takes time for higher interest rates to inflict economic damage. We follow that up with a discussion of something equally worrying that also lags Fed rate hikes. A financial crisis will likely follow the Fed’s “higher for longer” interest rate campaign.
We are not clairvoyant in predicting a crisis; however, we do appreciate financial history.
As shown below, a crisis occurs every time Fed Funds have risen abruptly. Looking closely, you will see that most of the situations followed rate hikes and were quickly addressed by the Fed with sharp reversals in the Fed Funds rate.”
USD futures are consolidating after crossing above the Cycle Top support/resistance at 105.60. There may be a brief retest of that support with a resumption of the rally next week.
Gold futures made a morning low at 1906.85, having declined beneath the Lip of the Cup with Handle at 1910.00. It remains on a sell signal beneath the 50-day Moving Average at 1953.43 and mid-Cycle resistance at 1945.16. Gold is due for a three-week decline that may reach the Cup with Handle target.
ZeroHedge remarks, “Singapore’s Channel News Asia (CNA) recently published a fascinating new documentary film about Singapore’s national reserve assets, including Singapore’s famed monetary gold reserves.
The CNA documentary includes a segment featuring BullionStar’s CEO Luke Chua in BullionStar’s vault visually explaining what 1 tonne of gold looks like, to illustrate the magnitude of Singapore’s gold reserves.”