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SpotGamma Quarterly Report Card: Q1'24

SpotGamma-Report-Card-Q1'2024-v2

Market Synopsis: Q1 2024

The S&P 500 (SPX) completed its strongest first quarter since 2019; this was despite a rocky start in January, where there were five red days in a row during what is ordinarily bullish Santa Rally seasonality. The first main spark that we saw, hinting that the rally would continue, was the January VIX expiration during a brief downtrend. January’s rally ended with the second biggest red day of the year, but we still opened February with a bullish outlook via a sharp line to 5000, conditionally upon SPX being able to breach our key level at 4900 that day and return to safety; SPX cleared our level that day and sailed to 5000 over the next week. Then, starting March at all-time highs, we asserted a non-conditional bullish outlook based on how our key levels were rising, which signaled a bullish structural advantage.

Tradable events and SpotGamma guidance include:

1/17 - VIX Expiration: Watch For A Buoyant Impact On Equities
2/1 - If 4900 Is Breached By The Morning, A Conditional Run Up To 5000 Is Likely
3/5 - We anticipate higher prices next week because of overpriced event volatility

SpotGamma Key Market Analysis

q1'2024
2023
2022

1/17 - VIX EXPIRATION

VIX Expiration: Watch for a buoyant impact on equities

SPX had just gapped down after three down market days. In the morning, we pointed out how it was VIX expiration and that the most expected result would be a move up from there. The market closed higher for the next six market days. From our 01/17 AM note: “In regards to the VIX expiration, we've chronicled many instances in the past (see Dec note here) in which equity markets have found some buoyancy the day before, and morning of VIX expiration... Back to the VIX, this morning we see the VIX at 14.5, which is its highest reading since mid-November.”

2/1 - run to 5000

If 4900 is breached by the morning, a conditional run up to 5000 is likely

This was the morning after the biggest red day of the year. But based on structural reasons, we saw the most likely outcome to be a quick run up to 5000 if SPX was able to break 4900 by the next day. SPX closed at 4906, and then moved up for the next eight market days, breaching 5000 after six days. From our Feb 01 AM note: “We are unchanged from the map we laid out yesterday. Equity sellers came out, but volatility buyers did not. This suggests the reflexive stock dip buyers/equity vol sellers are now taking a shot…. Yesterday brought some sharp weakness to equities, but by and large options implied volatility did not move… Should that happen overnight [SPX reaching 4900] with solid tech earnings then we could see a quick final push to 5000.”

3/5 - higher prices next week

We anticipate higher prices next week because of overpriced event volatility

At this point, the larger trend was up but trader convictions were being tested with a gap down over the weekend. Due to rising implied volatility tied to future economic events, as indicated by our Term Structure tool, it was just the right amount of vanna fuel to expect a bullish boost for equities. This is ultimately what we saw over the next few market days, and for the remainder of the first quarter. From our March 05 AM note: “We think there is some event-vol premium around all of these points [PMI / Fed Speakers / State of the Union], and the odds-on bet is that they pass as non-events. Should that happen, the event vol premium (i.e. higher IV tied to the event(s)) gets drained away, which should provide a short term boost for equities.”

1/11 - upside reversal

SpotGamma Calls for an Upside Reversal to start 2023

"Recently we have been discussing the chance of a very strong January rally." The result was a 6% increase to the end of January. This interrupted a full year of bearish momentum from 2022, which closed near the low of the year.

2/15 - temporary dip

A Temporary Dip Should Be Expected

"We have seen a shift lower in the SPX Call Wall to 4150 SPX, which is a bearish signal." This bearish signal proved to be ideal timing. There was initially a fakeout at the open where it rose higher, but this was the last frothy day, and the market sold off for a full month until it hit the bottom for the year.

3/13 - go long

Time to Transition Long

"From the trading perspective, you cannot rule out overly-exaggerated rallies, and ultimately there is plenty of fuel to run this market back up into the 4000-4100 area." This day ended up marking a turning point as being the low point before a very strong and extended rally.

4/3 - consolidation coming

SpotGamma Anticipates a Period of Consolidation

“Because the Call Walls rolled higher our models are not officially "overbought", but we maintain our view of consolidation to start this week. This led to 5 weeks of trading in a narrow window before the next breakout.

5/17 - megacap rally

Popular Megacaps Are in a Position to Lead a New Rally

“The upside cap for SPX remains at the 4200 Call Wall, and we continue to favor the popular mega-cap tech names to express upside.” Next, these are the names which led the following strong market performance.

6/15 - Weakness expected

Structural Weakness is Expected After Today (Triple Witching)

“We have been looking for a window of weakness to open into and after this expiration… The argument for a pull back now is of course driven by today's expiration, which now sees a massive amount of call delta's set to expire which could in turn reduce upside momentum.” This resulted in a short term pull back in equities.

7/12 - BULLISH UNTIL 4,500

Reiterating The Call For A Bullish Market, Cleanly Until 4,500

“Zooming out, our best case upside scenario into next week is a tag of the 4,500 Call Wall… There are currently very few options positions >=4,500, and gamma should increase into next Wednesday which may tighten the trading ranges down in the 4,400 - 4,500 area. Those looking to express upside are likely better off in single stocks. To the downside we are still "risk neutral" <4,400, and think that 4,300 would be a challenge to break before 7/21 OPEX.” Looking back, this was the right side of the market to be on. It has been in consolidation, with three out of four of the past daily candles being red, but from this morning’s call and onward we saw thirteen out of fourteen of the next daily candles as green, and not one red candle on the path to the 4,500 Call Wall.

8/8 - TARGET 4,400

Current Positioning Suggests 4,400 Is The Downside Target

Current positioning suggests 4,400 would be a major low.
“Framing this another way, our view over the last several sessions was that a break of 4,500 would lead to a rapid test of the 4,400 level, and an above average spike in volatility (aka higher vol-of-vol). While vol did perk up rather quickly, the probes below 4,500 were met with dip buyers…we see solid support at 4,450 & 4,400 which slows the decline.”

9/15 - sharp decline 

A Sharp Decline Could Accelerate With FOMC; This Is An Opportunity To Sell Calls

“We do however feel that one risk here is that the SEP OPEX/VIX Exp is clearing out downside put positions, which may have been supporting equities for the last several weeks. As OPEX rolls off, you can see in the gamma model below that the downside positioning shifts "up and out" as the "elbow" of that model moves from ~4,400 to ~4,200. This implies that there are now fewer puts down below, which in this case may mean there is less to absorb an equity decline… If you recall into August markets moved ~5% lower, but it was a grind over several days/weeks with IV remaining rather contained. Due to OPEX positions expiring, should the FOMC upset markets it could result in faster downside with higher relative IVs… Today may also be an opportune time to sell some Tuesday calls or call spreads, particularly if there is another rally today which energizes those short-dated calls.”

10/5 - path upward

The most likely path is upward until 4400 is tested

Following market weakness in September, a heavy amount of negative Gamma had built up, and the market was positioned for an upward move at the start of October. Over the course of the next week, the SPX rallied from 4,250 to 4,400 where we projected the S&P 500 would meet resistance. From the 10/5 Founder's Note: “There is still a lot of negative Gamma + Vanna that could unleash a very sharp rally up into the 4,400 area. Should stocks recover 430 SPY, it reinforces the idea of a move to 4,400, as breaking that level likely triggers a release of pent-up volatility premium.”

11/1 - extended rally

Markets are positioned for an extended rally

Two days after the bottom of a three-month-long correction, we modeled a heavy amount of Vanna fuel to be in the market. In light of this and other considerations, we announced finding an edge for an extended bullish move carrying on for a minimum of three more weeks. From our 11/2 Founder's Note: “For today, we are looking for a directional move that plays out over the course of several sessions, vs the relative "pinning" of the last few sessions… We want to give edge to this bullish move extending into Nov OPEX, assuming our various key options levels move up to confirm. However, the fuel that ignites a rally here would be short covering - that is the crushing of IV and put values therein. Sharply lower IVs is the Vanna fuel that could move things rapidly higher, but then we would need to see longer dated call buyers enter to confirm that a move is set to extend."

12/6 - santa claus rally

The market is showing signs of a Santa Claus Rally

After a strong November, the market took a pause before readying itself for another leg higher. In early December, we observed heavy support forming in our models on the MAG7 components. Throughout 2023, the MAG7 has led the broader equity market higher, and the options complex proved ready to advance higher for the next six consecutive market days. From our 12/6 Founder's Note: “We're now seeing some evidence that the downside is stalling out, based on large options levels. Shown below are major levels for GOOGL, and we can see that the $130 area is the largest Gamma strike, and that is not changing despite being tested over the last few sessions. This, we think, shows major support. Further, it's January that contains the most Gamma, which implies that this $130 support area may not change in the short term. There is a similar phenomenon with the other Mag 7's - the exception being NVDA which has a lot more Gamma expiring on 12/8.”

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