According to Tier1 Alpha, option dealer gamma remains in positive territory as of Wednesday’s close. When option dealer gamma is positive, option dealers sell strength and buy weakness to hedge their exposure. Positive gamma for option dealers increases the odds of LOWER realized volatility and SMALLER percentage moves up or down from one day to the next. Tier1 Alpha also notes that systematic strategies (CTAs and Vold Control funds) are the most invested (long equities) that they have been in the last 5 years. This means that a pick-up in volatility could trigger a substantial amount of mechanical selling. They are not saying that anything is imminent, but it is a warning not to get too complacent should market conditions change. Market Outlook Two down days in a row and bears on X come out in force to declare a top in the S&P 500. We suppose that if they pick a top every time the market has a down day after making a new all-time high, eventually they will get it right. As of now, Hedgeye’s macro forecast gets more bullish in October as reflationary conditions are likely to take hold. Reflation is a simultaneous acceleration in GDP growth and inflation. That combination tends to be very bullish for equities, especially small-cap stocks. On top of that, we have expectations for further Fed rate cuts ahead, which is unusual for the Fed to be cutting as inflation is still accelerating. Overbought RSI readings are usually good for short-term corrections within the trend. Wednesday was day 2 of the current pullback. If we get close to technical support on the Russell 2000 and/or S&P 500, we will be recommending bullish positions. According to the CME’s FedWatch Tool, federal funds futures markets are assigning a 94.1% probability that the Fed cuts rates by 25 bps on October 29.

Option dealer gamma remains in positive territory as of Tuesday’s close. When option dealer gamma is positive, option dealers sell strength and buy weakness to hedge their exposure. Positive gamma for option dealers increases the odds of LOWER realized volatility and SMALLER percentage moves up or down from one day to the next. Market Outlook Tuesday was the first down day of more than -0.10% in the last 12 trading sessions for the S&P 500. But as Tier1 Alpha points out, a large percentage of today’s down move in the S&P 500 is tied to movements of a few large-cap stocks. Oversold RSI readings are usually good for short-term corrections within the trend. We also must consider quarter-end window dressing as we approach September 30. As far as we are concerned, we are still in a bull market. If we see a pullback, we will look to add bullish strategies. Despite Powell’s comments on Tuesday, according to the CME’s FedWatch Tool, federal funds futures markets are assigning a 94.1% probability that the Fed cuts rates by 25 bps on October 29.

Market Outlook The September futures settled on Friday at 6658.77, in close proximity to the 6650 strike. It is also notable that the SPX finished the day at 6664, a 1,000% increase from its March 2009 bottom! While that rally in the SPX is impressive, we would like to point out that the price of gold has kept pace with the SPX over the last 30 years. The S&P 500 rallied into the close on Friday as the majority of the options in the S&P 500 expired on the close. It is interesting that the Russell 2000 gave back some of its outperformance from Thursday’s session. On Thursday’s close, the Russell 2000’s daily RSI was > 70, a classic overbought signal. On Friday’s close, the S&P 500’s daily RSI was > 70. After Friday’s record options expiration, dealer hedging activity will be greatly reduced starting next week. In some ways, this frees the market to move more easily up or down without interference from market makers who are actively delta hedging their book. That is why countertrend moves often occur after an options expiration. Given an overbought RSI reading in the S&P 500, some kind of short-term pullback next week should come as no surprise. If we get a 2% to 3% pullback before month-end, or simply a dip to the bottom of Hedgeye’s risk ranges for either the Russell 2000, S&P 500 or Nasdaq 100, we will be recommending bullish strategies. According to the CME’s FedWatch Tool, federal funds futures markets are assigning a 91.9% probability that the Fed cuts rates by 25 bps on October 29. We are skeptical of that rate cut assumption as inflation, as measured by the CPI, is likely to be reported well above 3% for September, according to Hedgeye estimates (the September CPI report is scheduled for October 15).