Why am I getting bearish on stocks?
1/ As SPX rips back to its highs, we see breadth deteriorating as the Mag7 are leading the charge once again.
2/ The options flows also back up this move as lots of calls were bought in the Mag7 names, which went deeply in the money and the CHARM effect of these options becoming 100 delta leads to more stock buying. Here is $MSFT 19Jan open interest, but looks the same for $NVDA, $AMZN, etc.
3/ $SPX dealers appeared to be long 19Jan options (4700-4800) as fixed strike vol kept getting offered and spot got bought back on every dip this week. The long GAMMA of these options meant that they had to cover short DELTA (a support that should be withdrawn today after OPEX).
4/ Meanwhile, behind the 19Jan expiry, the rest of the surface has been catching a bid. Fixed strike vol (31Jan-15Mar) since last Thursday is up huge! That is with SPX unchanged in the same timeframe although we did visit lows around 4720 this week. This tells us that $SPX option dealers are being taken shorter vol from flows and have less VEGA inventory.
5/ The obvious culprit was the massive VIX trade last Friday that bought 250k Feb24 17 calls and made the VVIX explode back higher. This has left the open interest in VIX calls very large in 14Feb and so a vol spike could get messy if we go there. SDEX has also popped which reflects more need for SPX protection as investors are still very long after chasing the Santa Rally.
6/ The sharp move higher yesterday was primarily driven by 0DTE call buying, especially in NDX which made new highs. This is not long term bullish flow, its speculative and technical.
7/ Sticking with technicals, we are seeing bearish momentum divergences across SPX and NDX and this often signals exhaustion and an imminent correction. De Mark sell signals are also flashing in certain Tech assets.
8/ "Window of Weakness" is open as our friend @jam_croissant mentions in this great summary so it makes sense to get some hedges in place, maybe out to March/April.
9/ Cycle analysis also suggests that a period of consolidation is likely according to our friend @CyclesGuyKuda who called last year's swings amazingly well with his robust seasonal analysis. open.substack.com/pub/kudachinha…
10 Whilst it's impossible to predict market swings with certainty, we can't help but notice a lot of stars aligning to suggest there is significant risk to an equity drawdown in the next 6-8 weeks. Crypto already pulled back 20% from its highs. YOU HAVE BEEN WARNED!
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