“Short term, I think we chop, maybe even test 6,650-6,600 if we see some profit-taking or a quick vol reset. That’s fine, it’s just noise. What matters is how the market behaves after that.”
That’s how I ended last week’s note… and, well, that’s exactly what we got.
It’s Monday morning, yeah I’m late. Normally the Week Ahead hits your inbox on a Sunday night, but after a week like that I needed sometime to actually enjoy my weekend! I’ve barely traded lately too. Sometimes you just have to sit on your hands and let the market do what it needs to which is what I have been saying for the past fortnight or so. The market has been stretched, volatility’s been stuck in the mud, and you could feel the pressure building. I said I wanted to see how the market behaves after a dip. I definitely did not see a 3% down day coming on Friday and I am yet to see anyone who predicted it. Anyone that can prove they did, I will happily give you a free month as I have never predicted a 3% down day for index with VIX <20. Maybe I should be subscribing to you if you called it… and of course knew Trump was going to say the T-word on Friday.
In case you missed it (I doubt you did) SPX touched 6,580 on Friday and CTAs triggered their first unwind levels, and vol finally woke up, and…… we printed the biggest options session in history (more than 100 million contracts in a single day). Dealer gamma flipped short, the VIX broke 22, and for the first time in months you could hear the bears breathing.
But let’s keep some perspective. This wasn’t panic selling, well some of it was, it was mainly mechanical deleveraging. The same system that’s been relentlessly buying for months finally hit a point where it had to de-risk. Hedge-fund gross sits near record highs while nets have quietly bled lower, and as I have repeated it’s not euphoric, just exhaustion and doubt. Vol-control was full to the brim, CTAs were “max long”, and the market simply ran out of oxygen when Trump decided to use his favourite words - tariff and China.
I’ve been quiet because sometimes the best trade is patience. I wanted to see whether those invisible hands that I kept talking about (the systematic bid, the disbelief bid) would hold when tested. And, well, they cracked…