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Pretty rough day out there—S&P 500 down about 1.8%, Nasdaq down around 2.2%, and small caps hit even harder, dropping 2.7%. However, the S&P is approaching a crucial level at 5,800, not just from a technical standpoint but also from an options perspective.
If 5,800 breaks, then 5,700 becomes the next major support level from both a gamma and technical perspective. Right now, we’re in a negative gamma trading range, meaning market makers’ hedging flows are moving with the market. If the 5,800 breaks then it is likely to result in a move down to 5,700 and more importantly, a break of the current trading range that has been in place since the election.
(OPTIONCHARTS.IO)
The VIX rose today to 22.7, and using the rule of 16 suggests an expected move of about 1.4% in the S&P 500, yet today, we moved 1.8%. This implies the VIX could be even higher and may not drop immediately. We have a few days of these large 1–2% daily swings. This supports the idea that the VIX should remain elevated around 20 or higher, and we may not get a big implied volatility crush, which helps to drive stock prices higher.
The Nasdaq is in a similar situation. Today, it nearly filled the post-election gap from November 5, a key support region between 19,900 and 20,200. This area is significant not only because of the gap but also as a prior resistance level back in August. If this level breaks, it could signal a double top, implying further downside. In that case, we could see a move back to levels last seen in September.
Looking at other indicators, high-yield credit spreads are widening. The CDX high-yield spread rose to 319 today. While they’re creeping higher, they remain historically low. That means they could widen significantly from here. When credit spreads start expanding, we typically see multiple contraction in stock indices. Right now, they aren’t flashing red, but momentum is building.
(LSEG)
Another key market signal is the 10-year yield, which has dropped back to 4.16%, the level from December 9. However, it’s getting oversold—RSI is at 27.5, and it’s below the lower Bollinger Band, suggesting it may be due for a bounce.
If rates break below 4.16%, we could see a move toward 4.00% or lower, though I’d be surprised by that given the current economic backdrop. The dollar also sold off today, signaling market concerns about future growth.
At this point, we may be at the beginning of something bigger, but we need to see key levels break before drawing stronger conclusions. For now, support levels are holding, but they’re getting tested.
-Mike
TERMS BY CHATGPT
1. Gamma Exposure (Gamma)
•Definition: Gamma refers to the rate of change of an option’s delta relative to movements in the underlying asset’s price. Gamma exposure, particularly in the context of market-wide options positioning, affects how market makers hedge their portfolios. Large gamma levels can lead to stabilizing effects (positive gamma) or amplify volatility (negative gamma).
2. Negative Gamma Regime
•Definition: A market condition where traders (usually market makers) are short gamma, meaning their hedging actions reinforce market movements rather than counteracting them. When prices decline, they sell more, and when prices rise, they buy more, increasing volatility.
3. Deltas (Market Maker Delta Hedging)
•Definition: Delta represents the sensitivity of an option’s price to changes in the underlying asset. Market makers adjust their holdings to stay neutral by buying or selling deltas. In a negative gamma environment, they must continuously adjust in the direction of the market, exacerbating moves.
4. VIX (Volatility Index)
•Definition: The Cboe Volatility Index (VIX) measures the expected volatility of the S&P 500 over the next 30 days, derived from option prices. A rising VIX indicates higher expected volatility.
5. Implied Correlations
•Definition: A measure of how individual stocks in an index are expected to move relative to each other. Rising implied correlations indicate that stocks are moving more in sync, often during market stress.
6. Credit Spreads (CDX High Yield Credit Spread)
•Definition: The difference in yield between high-yield corporate bonds and risk-free government bonds. Widening credit spreads suggest increased risk perception and potential economic slowdown.
7. ISM Prices Paid Index
•Definition: A component of the Institute for Supply Management (ISM) Manufacturing Index, measuring changes in input costs for manufacturers. Higher readings indicate rising inflationary pressures.
8. Stagflation
•Definition: A rare economic condition where high inflation persists despite weak or stagnant economic growth, often leading to difficult monetary policy decisions.
9. Bollinger Bands
•Definition: A technical analysis tool consisting of a moving average with upper and lower bands based on standard deviations. Prices moving outside the bands may indicate overbought or oversold conditions.
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