Aug

20

Post Op-Ex, from Gary Phillips

August 20, 2017 |

In 2015, there was a very pronounced seasonality around the 3rd Friday of the month, where the market would ramp higher going into both quad-witch options expiration, and non-quarterly expiration, and then mean revert lower post expiration. J.P. Morgan had a couple of strategies that provided exposure to such options expiry momentum and it's subsequent mean reversion. Of course, this Friday's August expiration saw the market sell off the day before opex, and close unchanged on Friday. This is very similar to what happened during May opex of this year, when the ES sold off ~3% two days before expiration. While I'm not quite certain what the market will do next week, ES rebounded strongly the week following options expiration back in May.

As Kolanovic explained, the reason a broader selloff did not ensue is that none of the triggers for systematic selling were breached. Momentum stayed positive, bonds rallied and almost totally offset the equity selloff, and vol targeting strategies had already reached leverage caps at higher levels of volatility than those reached on that day. Options positioning going into May 17 was benign and long gamma, and as is often the case, moves are reverted when there is positive gamma exposure.

Bonds are once again negatively correlated to spooz, offsetting falling equity prices, and today's vol levels have only increased commensurate with May 17th's levels, however current VVIX:VIX is substantially higher than back in May, and momentum has turned negative. September options open interest is skewed toward puts in the current trading range with large pins at the 2400 and 2350 levels.

The stuffed cabbage appears to be falling apart, and there is no shortage of potential explanations as to why: trumpeachment, tax reform delay, balance sheet reduction, fed tightening, and if there were to be a selloff this Monday–renewed bellicose dialogue between the Kim and the Donald over war games.

P/C ratios continue to be bearish, and don't show signs of being overbought. A post-expiration move below 2425-20 on Monday would take dealers further short gamma as expired hedges are rolled forward boosting volatility. A test of 2400 in the ES then seems likely where a break below, might not be bought. The 'world' is leaning against that level, and recent statements imply the Fed may not be as inclined to be a buyer, as they have been in the past.

The powers that be seem determined not to allow gold to build value above 1300, however the $/yen is on the precipice, and further domestic conflict would pare it's price and support rallies in gold and treasuries. In any case triple bottoms (usd/jpy) and triple tops (gc) never hold.

Jim Sogi writes: 

Last weekend they paid a nice premium for taking the risk of holding their goods over the weekend. Always risk, and that's what they pay for.

Ralph Vince writes: 

Don't know if we'll see that tomorrow, but volatility is certainly telling us (very strongly) this is not the correction it seems most are looking for yet.

I still think we challenge the all-time highs first, and, very possibly, go into another strong up leg this Autumn on the inevitable tax cut legislation. The big bull–from wherever you begin looking at it from, March 09, Nov 2012, or, as I see it from January 2016, is far from over. And that means higher highs before it is.

I can be long and wrong but not short and wrong on the timing of all of this. But I'm quite certain we're going right back up to those all time highs here, just not so sure about tomorrow.

The bull market in bonds takes a breather this week.


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