The S&P 500 Got Its Bounce. Now Comes The Hard Part.

Stocks rallied today, as expected. A rally seemed inevitable, given how elevated implied volatility had become and how negative gamma and delta positioning were, as I pointed out over the weekend. As I said on Sunday, if stocks hadn’t rallied today, it would have been a really bad sign.

Does the rally last? Is the sell-off in the technology sector over? It’s hard to say. The Nasdaq 100 was down well over 10% at its low, while the SMH had fallen more than 30%. So, while today’s rally was impressive, I’m not sure what it tells us about the longer-term picture.

In the end, negative gamma positioning likely amplified today’s rally. In other words, much of today’s rally may have been driven by mechanical hedging flows rather than a meaningful shift in the market’s underlying fundamentals.

Liquidity flows remain negative and are likely to stay that way for another couple of weeks. We also have Treasury bill settlements tomorrow, so nothing has really changed on that front.

The one potentially bullish factor for the market right now is that the VIX 1-Day is sitting around 16. That leaves room for it to fall back toward 10 or 11 at tomorrow’s open, potentially boosting stocks as short-dated option premiums decline and hedges are adjusted. However, I would expect that boost to be smaller, probably less than 1%.

Finally, Nvidia could be in for a rough period, and I seriously don’t know where the market really goes if it has lost Nvidia.

Mike

Glossary by ChatGPT

Delta Exposure: The directional sensitivity of an options position to changes in the underlying asset’s price, often expressed as an equivalent exposure to the underlying security.

Gamma Exposure: The sensitivity of an options position’s delta to changes in the underlying asset’s price, which can influence the direction and magnitude of dealer hedging flows.

Hedging Flows: Buying or selling of securities or derivatives to manage financial risks, including changes in options delta and gamma exposure.

Implied Volatility: The market’s expectation of future price fluctuations derived from options prices.

Liquidity Flows: Movements of cash and available funding through financial markets that can influence asset prices and financing conditions.

Negative Gamma: An options positioning regime in which delta-hedging activity can amplify price movements, with hedgers potentially buying as prices rise and selling as prices fall.

Options Premium: The price paid to purchase an options contract, reflecting intrinsic value, time remaining until expiration, implied volatility, and other factors.

SMH: The VanEck Semiconductor ETF, which provides exposure to major semiconductor companies.

Treasury Bill Settlement: The date on which newly issued Treasury bills are paid for and delivered, potentially affecting cash balances and money market liquidity.

VIX1D: The Cboe 1-Day Volatility Index, which measures expected S&P 500 volatility over approximately one trading day.

Volatility Crush: A rapid decline in implied volatility that reduces options premiums and can influence market-maker hedging activity.

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