Stocks Rally On October 14 Ahead of Option Expiration, For Now At Least

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October 14, 2021

Stocks – NONE

Macro – SPY, VIX, DXY

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So the market decided today to pull itself together and stage a massive short-covering rally into options expiration tomorrow. This rally would have been more appropriate yesterday given how much the Dollar index pulled back, but instead, they decided to rally it today.

The VIX moved lower, closing at 16.85. The last time the VIX closed below 17 was back on September 2, at 16.40. Interestingly, and more to my point I was trying to make yesterday, in my The Dip Is Dead story, and here on this blog, September 2 also happened to be the day the S&P 500 topped out at 4537. So here we are now at the same spot, essentially, on the VIX, but the S&P 500 is about 100 points lower.

Maybe this isn’t an easy concept to understand, but if the VIX doesn’t start going lower, the S&P 500 will have a tough time rising back to its previous highs. Now could the VIX go to 15 or 13? Sure, it could, but given the unresolved Evergrande situation and increasing uncertainty in earnings estimates, now may not be an ideal time for the VIX to go to 13. Not to mention the VIX index has been steadily trending higher since June.

S&P 500 (SPY)

The S&P 500 rose today by around 1.7%, allowing it to finally refill the gap from September 27 while also again climbing to the 50-day moving average. Meanwhile, today’s move looked almost identical most of the day to the action on October 7, but by the days closed, it looked more like the move on September 23. Both of those days had big moves higher, with massive gaps up, and both moves ended the same with the market refilling the gap at lower prices days later.

Technically speaking, the gap at 4,440 is filled, and it should result in a continuation of the overall trend, which is lower. Additionally, there is now a gap that needs to be filled at 4,360. So since tomorrow is options expiration, and there will be a ton of gamma expiring for the indexes on the opening, there could be a very big gamma hangover. Not to mention if you think the market has been volatile now, just wait.

The other part of the equation is that the S&P 500 has been tracking the dollar very closely, which was crushed yesterday. Today the dollar was flat but managed to finish well off of its lows, just below 94. Since Jackson Hole, the dollar and the S&P 500 have been tight, so again, watch the dollar index; if it starts rising again, the rally in stocks will stall out.

Anyway, that’s it for today. I didn’t pay close enough attention to the market today to focus on individual stocks.



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