First Interesting Morning In A While

TVC:VIX   Volatility S&P 500 Index
Whooo boy, interesting market out there. First fun day in months! The following is taken from our morning market note:


For the first time in a long time, the daily and weekly technical picture has nearly fully diverged, with the weekly situation only registering a short term bump, while the daily reads nearly fully negative.

The Weekly Shard remains strong, as it continues to paint green candle after green candle. Weekly Technicals continue to worsen slowly, however, as a result of the volatility the market is seeing overall. In combination with the Shard, the weekly situation continues to look mildly bullish . The market has now reached a Zone 4 however, which signals that we are back to fully neutral territory from a mean reversion perspective.

The Daily Shard and Technicals are both indicating lower prices, and the Market Zone is reading a Zone 5 for the first time in nearly 4 months.

Which one is right?

We expect that the daily situation will ultimately turn out to be a "buy the dip" scenario, and plan on beginning to short puts in good names this morning. It appears that the options expiration, in combination with the global growth China fears & credit situation, have finally provided short term volatility and a noticeable dump in equity markets. Neither the Evergrande risk nor the short term GEX situation should prove to be long term bearish catalysts, however, hence our reasoning.


Gamma exposure has come off significantly since Friday's close, as the majority of index options exposure has expired and dealers are now less incentivized to stuff price action. As expected, this has caused a huge dislocation this morning in equity markets.

Equity investor anxiousness & protection buying has increased substantially into the close last week, which is likely due to increased fears of the Evergrande situation having a contagion effect in commodities , energy, and credit markets. Investors overall are well-hedged for this event however, which should lead to reduced overall panic / downside.

IV is spiking this morning on the selloff. We don't think the root causes will cause serious damage to the overall bull market, but we may see increased volatility for the next few weeks as a result. We are looking for secular winners unrelated to commodities / China exposure to sell premium on.
Comment: Additionally, we have been tracking the Evergrande situation for a little while now. Here's our take:

"China is currently going through their own potential Lehman crisis, with the collapse and default of its largest property developer, Evergrande. According to a couple sources, the outstanding debt totals around $300 Billion USD, which is more than the total value of assets that imploded in 2008 in the US. Should this situation spiral into a credit crunch or other asset classes, take down some banks, or meaningfully affect ecnomic growth in China over the long term, it could represent a risk to growth in US. equities that, to some degree, rely on globally growing GDP. We are underweight Chinese equities until the ISM situation improves, this debt balloon deflates, and the regulatory environment becomes less erratic."
Comment: FXI continues to be Un-investible