The Stock Market Has Two Chances To Bounce. It's Already Wasted One.

Stocks didn’t rebound much on Friday despite being set up to. They should be set up to rebound again on Monday, with the 1-day VIX closing Friday at nearly 29. If there’s no bounce on Monday either, that would be the second day in a row of failing to rally from a setup built for one, and that isn’t a good sign.

The S&P 500 is in negative gamma at this point, with the put wall at 7,300, and even net delta is now estimated to be negative. The last time we saw that was at the end of March. So the index is back in a regime where selling begets more selling and buying begets more buying. With volatility this high and a sharp drop in that 1-day vol likely Monday morning, a failure to rally would be a big negative for this market.

It’s also important to remember that the options market is more bearish today than at any time I can remember since the spring. The heatmap of the top 50 names in the index shows how much has shifted in just a few weeks, with more stocks showing elevated put skew and higher implied volatility.

If this environment persists, the market would likely keep heading lower. That’s the part we still don’t know, and it will take more time to find out. Certainly, the liquidity backdrop isn’t supportive right now, with a very heavy stretch of T-bill issuance and more than $57 billion in net issuance expected. That will likely keep draining market liquidity.

The CPI report, of course, is the wild card. A hotter-than-expected reading could push Fed policy in a more hawkish direction, which would tighten financial conditions further. Financial conditions have already tightened, and that tightening is starting to weigh. The Fed’s efforts to tighten conditions appear to be showing up, and if that continues, it will be the ultimate driver of markets, just as it was in 2022.

Tightening liquidity, coupled with tightening financial conditions, may be something not even the AI trade can overcome.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Chicago Fed National Financial Conditions Index (NFCI): A weekly measure of US financial conditions across money markets, debt markets, equity markets, and the banking system, with higher readings indicating tighter conditions.

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

Gamma Exposure: The aggregate sensitivity of options delta to changes in the underlying asset’s price, which can influence market-maker hedging activity.

Hawkish Monetary Policy: A central bank policy stance emphasizing inflation control through higher interest rates or tighter financial conditions.

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

IV Percentile: A measure showing the percentage of observations over a specified historical period in which implied volatility was below its current level.

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

Net Treasury Bill Issuance: The value of newly issued Treasury bills minus maturing bills, representing the net change in outstanding short-term government debt.

Put Skew: The relative premium embedded in downside put options compared with other options, often reflecting demand for downside protection.

Put Wall: A strike price with a significant concentration of put options positioning that may influence hedging flows and underlying market behavior.

Skew Rank: A measure of the current level of options skew relative to its historical range, used to assess whether downside protection is unusually expensive.

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, often following the resolution of an anticipated event, which can influence options-related hedging flows.

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The Stock Market Has Two Chances To Bounce. It’s Already Wasted One.

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