The S&P 500 declined 3.2 percent, closing below the 4000 level in a broad-based retreat led by the growth stocks, despite the decline in yields (10Y -4.4 bps).
The good: Price action was relatively controlled, with little sign of “panic in the air”.
The bad: Prices refused to show effort and use the extremely negative gamma environment to stage a meaningful counter-rally.
The ugly: The SPX closed below the hugely important 4000 level.
From a pure gamma standpoint 4000 is the strike with the most call & put open interest tied to it and below that infliction level the markets are now entering a zone were literally no call contracts exist, hence the negative gamma weighting of strike sub 4000 will increase very fast, if markets start to panic and iV explodes higher.
In such a case option dealers would need to step up their hedging efforts further, which could lead to a more uncontrolled environment.
Investors received a relatively friendly financial stability report after the close, so this hopefully will calm markets down, and also rate hike expectations cooled down quite a bit today (-33bps), which could be viewed as supportive. On the contrary, consumer inflation expectations with a three-year horizon increased further, according to a Fed survey.
Outlook: In a controlled negative scenario (no catastrophic VIX levels), the market could drop to 3900/3800 and find support there, as the need for dealers to adjust their initial delta hedges would quickly abate in that region. Should markets receive a positive catalyst then prices could quickly snap higher given the extremely oversold market.
The good: Price action was relatively controlled, with little sign of “panic in the air”.
The bad: Prices refused to show effort and use the extremely negative gamma environment to stage a meaningful counter-rally.
The ugly: The SPX closed below the hugely important 4000 level.
From a pure gamma standpoint 4000 is the strike with the most call & put open interest tied to it and below that infliction level the markets are now entering a zone were literally no call contracts exist, hence the negative gamma weighting of strike sub 4000 will increase very fast, if markets start to panic and iV explodes higher.
In such a case option dealers would need to step up their hedging efforts further, which could lead to a more uncontrolled environment.
Investors received a relatively friendly financial stability report after the close, so this hopefully will calm markets down, and also rate hike expectations cooled down quite a bit today (-33bps), which could be viewed as supportive. On the contrary, consumer inflation expectations with a three-year horizon increased further, according to a Fed survey.
Outlook: In a controlled negative scenario (no catastrophic VIX levels), the market could drop to 3900/3800 and find support there, as the need for dealers to adjust their initial delta hedges would quickly abate in that region. Should markets receive a positive catalyst then prices could quickly snap higher given the extremely oversold market.