A Funny Thing Happened Under The Surface Of Yesterday’s Equity Market Melt-Up…

US equity markets are ripping-faces and taking names in the last 36 hours (post-OpEx), soaring 5-6% off Sunday night lows after pounging into the close on Friday (month- and quarter-end)…

However, make no mistake, put-fueled rallies (like this one) are violent, but unstable.

As SpotGamma explains this morning, if traders now come in and initiate call positions, that should lower volatility and create a base for a more sustainable rally.

However, there is nothing to stop this market from reverting and giving up all of these gains in 1 session.

We now have to see how positions form, but we are of the belief that call positions entered last week should be rolled up in strike and/or out in time to capture gains and reduce risk.

Problematically for the bulls hoping for follow-through in this rally, as Nomura’s Charlie McElligott notes, it is worth noting ongoing skepticism again here from clients from a pure “intraday greeks” perspective on US Equities benchmark SPXSPY and QQQ Options, as we actually saw clients adding NEW HEDGES in downside Puts / net Negative $Delta in “new” flows on the session yesterday, DESPITE the substantial Spot Index rally…

The other oddity here, is implied volatility. SpotGamma surveyed dozens of IV metrics yesterday, and were rather unimpressed by the decline in Implied Vol (IV). One with think that IV would be crushed given the equity bounce. On one hand there was a very sharp rally which, in theory, supports high IV. But we did not get the impression that traders elected to short OTM puts.

For example below SpotGamma plots VOLI (“ATM VIX”, blue) vs SDEX (skew/price of OTM puts, indicator explainer here). What this shows is that ATM IV came down some, which we could again waive off as the market rise being quite volatile. However you can see the SDEX (blue) hasn’t reverted which suggests that traders did not begin to sell those OTM puts. In other words, this rally was not (yet) a “put capitulation” – at least as of yet – confirming what McElligott noted..

From here, Nomura’s McElligott writes that markets can certain keep running as the “trend trades” are reversed out; but it will come down to the data – both the very “Jobs centric” rest of week US Data, as well as the obviously critical next CPI data – which will act as an “accelerant” flow, either with:

“misses” / downside in both further then adding fuel to the “dovish” fire for Bonds and Equities short-squeezes and under-positioning…

OR,

where further “sticky upside” in hot Jobs / Wages / Core Inflation would see all of this recent “dovish optic” from the FCI trend trade PNL risk-management unwinds get added back with what would be a painful resumption of the “FCI tightening” impulse.

Simply put, as SpotGamma concludes, equity prices are higher, but the jitters are not gone. Risk remains high.