Market Wrap
The SPX opened higher, but a weak Consumer Confidence Index ruined the rally efforts quickly and send stocks lower.
According to the Conference Board, the benchmark index dropped to 98.7 points and now stands at its lowest level since February 2021.
The Expectations Index based on consumers’ short-term outlook for income, business, and labor market conditions, decreased sharply to 66.4 from 73.7 and is at its lowest level since March 2013.
To make matters worse, future markets (see chart below) refused to price in help from the Fed as inflation expectations only increased and energy markets are now betting on a reopening of China and the lack of spare capacity from oil producers.
https://www.tradingview.com/x/pqdZnFfP/
The bear market rally, that had its seeds in a record amount of put options expiring on June 17 and was since then driven by buybacks ahead of the blackout window (according to sources), seems to be over prematurely.
We are no technicians, but just looking at obvious patterns, the situation reminds us of several instances since April, when big spikes were followed by fast sell-offs, before markets dropped to new lows.
What's the upcoming playbook? On June 30, end of month options will expire, but the impact will be very manageable as only 12 percent of gamma and 12 percent of delta will get killed/rolled (chart not included).
There will also be the expiration of the JPM collar as mentioned in our Morning Briefing, but this impact is already included in the numbers above.
On July 13 the earning season gets kicked of with major banks releasing their reports, and this means a) that buybacks have come to a standstill by then and b) the risk that we will discover a new narrative (earnings revision) is emerging.
Several sell-side papers have now launched the idea of an earnings revision shock, that could drive the SPX down to the 3400 area, which would certainly lead to the capitulation of retail and open the door for a fresh start.
Chart below: Volume was high at lower strikes (3700, 3650, 3600, 3500,3400) and we probably see a buildup of fresh put positions at those lower levels tomorrow morning.
https://bucket.mlcdn.com/a/3517/3517811/images/62ea37b043f27d02743af6d9d7055e4d67bd3b0c.png
Implied volatility was 1.2 points lower than our model suggests, but the danger of vol spikes need to be pointed out, even though something seems to suppress the VIX quite a bit at the moment.
Another, more simplistic way, to look at implied vol is, to compare it to realized vol. As the chart below suggests is implied volatility relatively cheap compared to rV.
https://bucket.mlcdn.com/a/3517/3517811/images/b1c2b1d7a1134a2061e109a66e4c8d66e03a011e.png
In a market that is characterized by negative dealer gamma implied volatility tends to take the lead and any vol explosion higher especially from (relatively) low levels can have a massive impact.
According to the Conference Board, the benchmark index dropped to 98.7 points and now stands at its lowest level since February 2021.
The Expectations Index based on consumers’ short-term outlook for income, business, and labor market conditions, decreased sharply to 66.4 from 73.7 and is at its lowest level since March 2013.
To make matters worse, future markets (see chart below) refused to price in help from the Fed as inflation expectations only increased and energy markets are now betting on a reopening of China and the lack of spare capacity from oil producers.
https://www.tradingview.com/x/pqdZnFfP/
The bear market rally, that had its seeds in a record amount of put options expiring on June 17 and was since then driven by buybacks ahead of the blackout window (according to sources), seems to be over prematurely.
We are no technicians, but just looking at obvious patterns, the situation reminds us of several instances since April, when big spikes were followed by fast sell-offs, before markets dropped to new lows.
What's the upcoming playbook? On June 30, end of month options will expire, but the impact will be very manageable as only 12 percent of gamma and 12 percent of delta will get killed/rolled (chart not included).
There will also be the expiration of the JPM collar as mentioned in our Morning Briefing, but this impact is already included in the numbers above.
On July 13 the earning season gets kicked of with major banks releasing their reports, and this means a) that buybacks have come to a standstill by then and b) the risk that we will discover a new narrative (earnings revision) is emerging.
Several sell-side papers have now launched the idea of an earnings revision shock, that could drive the SPX down to the 3400 area, which would certainly lead to the capitulation of retail and open the door for a fresh start.
Chart below: Volume was high at lower strikes (3700, 3650, 3600, 3500,3400) and we probably see a buildup of fresh put positions at those lower levels tomorrow morning.
https://bucket.mlcdn.com/a/3517/3517811/images/62ea37b043f27d02743af6d9d7055e4d67bd3b0c.png
Implied volatility was 1.2 points lower than our model suggests, but the danger of vol spikes need to be pointed out, even though something seems to suppress the VIX quite a bit at the moment.
Another, more simplistic way, to look at implied vol is, to compare it to realized vol. As the chart below suggests is implied volatility relatively cheap compared to rV.
https://bucket.mlcdn.com/a/3517/3517811/images/b1c2b1d7a1134a2061e109a66e4c8d66e03a011e.png
In a market that is characterized by negative dealer gamma implied volatility tends to take the lead and any vol explosion higher especially from (relatively) low levels can have a massive impact.
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