S&P 500 Rally Fueled by Gamma Squeeze as Volatility Risks Build

It was the semiconductors’ turn to rally today as the merry-go-round continued. It has been a very odd couple of trading sessions, given the magnitude of the moves we’ve witnessed. Nvidia and Broadcom led the market higher today.

The market seems very erratic these days, and I don’t know whether it is due to a lack of liquidity, options trading, or positioning that has become offside and is creating squeezes. It just doesn’t seem normal to me. What stands out, both from memory and the current data, is that gamma positioning in the S&P 500 had been negative while delta positioning was essentially flat. The SPY was even more extreme, with both gamma and delta positioning negative, and both have now violently reversed into positive territory. The market had been positioned for a move lower, but instead everything was flipped on its head, and those negative gamma and delta positions have been squeezed out and unwound.

It explains the violent move. More importantly, now that we are back in positive gamma and gamma exposure actually declined today, it suggests the squeeze is probably over. Additionally, with a heavy slate of economic data still to come this week, implied volatility is likely to continue rising. That is likely why the 1-day VIX closed near 14 today. I would not be surprised to see it closer to 20 by the close on Thursday, given Friday morning’s jobs report.

Additionally, the spread between dispersion and correlation narrowed today, continuing to send a non-confirmation signal on the rally over the past few sessions. Ultimately, this spread has tended to be a reliable indicator of the index’s direction over time, and I suspect it will continue to contract.

-Mike

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Glossary by ChatGPT

Correlation — A statistical measure of how closely securities or markets move together over time.
Delta Positioning — The aggregate directional exposure of options positions to changes in the price of the underlying asset.
Dispersion — The degree to which the performance of individual stocks differs from the overall index.
Gamma — An options risk measure that reflects how rapidly delta changes as the underlying asset’s price moves.
Gamma Exposure — The net market sensitivity to gamma, often influencing dealer hedging activity and market volatility.
Implied Volatility — The market’s expectation of future price volatility as reflected in options prices.
Liquidity — The ease with which an asset can be bought or sold without significantly affecting its price.
Negative Gamma — A market condition in which dealer hedging can amplify price movements rather than dampen them.
Positioning — The aggregate exposure and allocation of market participants across assets or derivatives.
SPY — The SPDR S&P 500 ETF Trust, an exchange-traded fund designed to track the performance of the S&P 500 Index.
Squeeze — A rapid price move driven by traders being forced to unwind positions, often accelerating momentum.
VIX — The CBOE Volatility Index, commonly used as a measure of expected market volatility over the next 30 days.

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