S&P 500: Could Volatility Crush, Negative Gamma Fuel Another Leg Higher?
2025.01.16 03:38
Stocks moved higher yesterday. Last time, I noted that the was likely to rise no matter what the report was because implied volatility was so high, which is pretty much what happened. The move was a bit more extreme than I would have imagined, but then again, I forgot that the index was in a negative gamma regime and that market makers must chase the futures as they move higher. So, the combination of a volatility crush and negative regime was primarily responsible for the move.
Could it keep the index going today? That remains to be seen.
Today is the Thursday before OPEX, which means the will buy back those NDX index options it sold last month. Those options are at the 21,275 strike price for January 17. They served as resistance yesterday when the tested that level intraday.
The buyback of this call option generally starts around 2 PM ET, so if a magical bid in the market occurs at that point, do not be surprised. They will sell a new call on Friday.
CPI Data Meets Expectations, but Bigger Inflation Risks Could Lie Ahead
The was pretty much as expected, with the headline at 0.4% m/m and 2.9% y/y. Some final data movement pushed the estimates to 0.3% m/m, and that caused the miss when the results came in at 0.2%. But again, it is hard to say it was a surprise or that suddenly things are so much better. The January CPI swaps pricing was unchanged yesterday, with CPI expected to rise by 2.9% y/y, implying a 0.3% m/m increase. So, there is just not much that has changed on that front.
The move down in rates was driven by the Core CPI report and a big move lower in European rates, following a weak report in the UK. yesterday, the was trading lower by 11 bps before the US CPI report, and it ended up finishing lower by 18 bps.
The global impacts played a role in the big move in the yesterday, just as it has significantly driven US rates higher. The 10-year rate was overbought, and it was due for some pullback. I think it will find support in this 4.65% to 4.7% range since it has been an area of consolidation on more than one occasion.
The 2-year inflation swap was a touch higher on the day, which is surprising given the “soft” core CPI report. Swaps are more intelligent than I am, and the media, for that matter, is sending a message of much higher headline inflation to come and appears to be in a perilous spot at this point.
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