Skew Makes Lower Lows as the SPX Scores its Highest Close (...yet) 🎯

Much to the dismay of our short index delta...
equities continue to march higher despite the nascent strength in rates, and pushback on the imminent timing of those "first cuts."

Take a look at the rate response to last month's FOMC- where Powell & Co. set in motion a broad "rolling out" of the market's expected timing of first Fed rate cuts...

USG 2YR (Yield) Performance since JPOW

USG 10YR (Yield) Performance

. . .given the apparent FC / EASING- driven rally (which got us here)

It would be reasonable to expect the indices to show some weakness... you know- slowing... or signs of reversal given the quick tightening reflex...

But the broad market either doesn't care (yet), or the recent tech outperformance is just so strong that its bullish contribution completely dwarfs any negative impacts arising from the late pickup in yields.

Forget about scaling the Wall of Worry...

—we just burst right through it!

But... the divergence between real yields and the index is a real cause for concern.

See the gap, below:

SPX vs US 10YR REAL YIELD (inv)

Will rates matter again? If so, when?

Of course they will- but we would be lying if we told you we haven't already lost money betting on when.

Ultimately... there's no reason we have to reverse here.

And it doesn't make much sense to bet against big tech when they're delivering grand slams, printing money hand over fist...

—and buying back billions of their stock with it!

. . .calling tops is *HARD*

Considering the natural path of equities- it's actually quite a bit harder than calling bottoms.

That said- there's good reason to set yourself up for a pause here, if not an outright pullback.

And if you believe instead that we are MOONWARD BOUND well then- at least get yourself some cheap hedges in case we have a Challenger- situation. 👀

The Case for Consolidation

Here we are, already up 5% YTD. We're sitting right atop the JPM JHEQX Collar Call...

At 5015 we have approximately 40,000 dealer long calls from this overwrite.

Take a look how long it took the index to work through the last JPM Call level of 4510. Ages ago... in... December of '23.

SPX 11/1 - 12/31

5% YTD...

We've come pretty far, pretty fast- and seem to be ignoring the quiet pricing out of the (expected) rate cuts which helped us get here in the first place.

Which begs the question: Why isn't anyone hedging?

Despite the enormous gains and their breathtaking pace, we still see little evidence that anyone cares to protect them.

Case in point- 3M Put - Call Skew:

SPX 3M 25D P - SPX 3M 25D C IVOLs

So far... we've "thread" the needle along our "Goldilocks" path as nothing has shaken this market's upward trajectory.

The pace of the rally has mostly been just right- allowing us to grind just a little bit higher each day, without triggering any VIXplosion led by dealers hedging short VIX call inventory.

Instead, this market has chugged along at just the right pace to allow for VIX charm to work its magic...

...as all those VIX futures bought vs Feb calls sold (by dealers), have been steadily unwound.

And while the market lurches ever higher into SPX dealer short inventories- any upward impulse in volatility seems to fade by midday as volatility selling kicks in and replenishes dealers, saving them from needing to mark IVs higher (so far).

For now, this all appears remarkably stable. But it's a delicate balance.

Which brings us back to our main point.

If you are long here, there's never been a better time (or price) to hedge.

And if you aren't quite sure... the possibility of a brief consolidation into Feb OpEx followed by a breakout or reversal is compelling. Look at GS' EQMOVE index, yet again suggesting that options are underpriced:

GS EQMOVE Model: Options are underpriced **again**

It would be unfair to say there's been "no hedging" whatsoever—

We pointed out over the last ~1-2 weeks there have been some signs of hedges rolling up and out of the ~4400-4600 range and into the 4800-4900 range. 

This is reflected in a recent note on dealer strike-gamma, courtesy of Nomura's Charlie McElligott.

Take a look at the positioning (yes- we're also confused about the lack of dealer-long strike gamma on the 5015 line...)

h/t Nomura

Note the recent themes—

Dealers are short immediate upside while long immediate downside.

Importantly- this chart was sent out with Charlie's Feb 07 '24 note.

...the very next day, we saw signs of dealers getting lifted out of substantial portions of their gamma at the 4900 line, via the 3/28 4600 / 4900 Put Spread→

SPXW 28-Mar'24 4600 / 4900 Put Spread... bought ~5.3k for $30.20 on 02/07

The trade appears to hit w/ SPX @ 4997- meaning for around 60bps you're covered between 92 and 98% of spot with a nearly 10:1 max payout at expiry.

Some additional hedging... this one shows up in the chart above:

SPX 21-Jun'24 4800 / 5400 Risk Reversal (+P/-C)...bought ~6.7k for ~$57 on 02/06

This risk reversal traded across a span of several hours... electronically.

Additionally, as we climb we see some traditional over-writers rolling strikes up and out. The following is a recent highlight- broadly indicative of flows you'd expect to hit a few times a week at this point in the range.

SPX Mar'24 4850 / Apr'24 5200 Call Spread... bought (Mar) ~1,850x for $138.80 on 02/07

This resetting of overwrites helps to shift some of the "long downside" to "long upside", nudging the dealer position back to "normal".

Despite the resilience we'd advise a guarded stance into next week.

We have CPI on Tuesday

VIXpiration on Wednesday

and SPX OpEx on Friday...

CPI can set the tone for the direction of the subsequent "VOL UNCLENCH" while SPX OpEx on Friday may loosen up the range a bit (although we'd note that the index in this range hasn't been as compressed by "long gamma" as it was in December, or January for example.)

Good luck, whatever your position... and enjoy the game🍻

   ~ Carson