Ths SPX closed two percent higher on Thursday and was able to clear the important gamma marker at 4000 index points, from where the momentum accelerated further.
Biggest gainer among S&P 500 sectors was the consumer discretionary complex (+4.9%), which was pulled higher by mega caps like Tesla (+7.4%) and Amazon (+4%) and which featured several components with double-digit gains (Dollar Tree +21.9%, Macy’s +19.3%, Dollar General +13.7%, Norwegian +12.1%).
Consumer stocks were boosted by friendly guidance from several companies and an upward revision to the consumer spending component in the Q1 GDP Report (to 3.1% from 2.7%).
Main drivers in our opinion were the prospects of lower rates/less hikes (see morning briefing), which ultimately translated into a sharp short/gamma squeeze.
The analytics firm Vanda Research reported that it is mainly the retail investor, who is - despite dramatic portfolio losses - holding up the market at the moment, while professional asset managers are reducing equity allocation.
So there we have it: Retail investors forcing option dealers to ramp the market higher in a highly illiquid market (according to Vanda it currently takes only 10MM to move the market by 20 bps).
Gamma discussion:
Dealer gamma increased by a whopping 229MM to -494MM. Targets on the upside are 4100 and 420 (gamma inversion), while downside targets are 4000/3950/3900.
Tomorrow top-hawk Bullard is speaking, which could drive rate expectations higher (and stocks lower) again, while investors will receive PCE inflation numbers for April and the Michigan Consumer Sentiment.
The market is far from out of the woods yet and still in a short gamma environment which means option dealers are “liquidity takers” and will hedge cyclically (if the market goes up they buy more, if the market goes down they sell more).
Here is the correlation between the US02Y and the FED interest rates. Historically, fed funds follow the US02Y until it rolls over in which they pause further hikes and eventually start lowering rates. Something very different here is how extremely late they are to the party this time. It has already reached its APEX and it's ready to roll over but the fed just started hiking two months ago... with their inflation target still nowhere in sight. So how on earth do they not have to continue to hike? If, for example, they are forced to keep hiking, then it would break a historical trend likely sending algos into chaos. Let me know your thoughts
GammaLab
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@NoOneWhoIsSomeone, hello, interesting chart, but a little misleading, because the TV's Fed Funds rate is not up to date (it should be 50 bps higher). Add that plus two fast hikes (another 100 bps) and the 2-year yield makes sense.
NoOneWhoIsSomeone
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@GammaLab, Good point, I have adjusted for accuracy. The other issues that stand are inflation and that this would be the shortest hiking cycle to date in the face of the worst inflation to date. Just an interesting situation, thank you for comm!
Kryptolinks
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@NoOneWhoIsSomeone, Interest rates are not the only tool to do the tightening though. Bonds doing the tightening + demand suppression is doing a whole lot to curb the inflation.
Here is the correlation between the US02Y and the FED interest rates. Historically, fed funds follow the US02Y until it rolls over in which they pause further hikes and eventually start lowering rates. Something very different here is how extremely late they are to the party this time. It has already reached its APEX and it's ready to roll over but the fed just started hiking two months ago... with their inflation target still nowhere in sight. So how on earth do they not have to continue to hike? If, for example, they are forced to keep hiking, then it would break a historical trend likely sending algos into chaos. Let me know your thoughts