1/x So 1st things first, Vanna/Charm flows will continue to be very supportive.11/4-9 to 11/20-11/23 Ivol backwardation is simply too steep.W/out meaningful stress(<3100 SPX) the path of least resistance is therefore higher this week, despite the technically broken picture.
https://twitter.com/jam_croissant/status/1322212131777912832
2/x more likely even than an up market IMO for the next several weeks though is short-dated Ivol compression, again quite simply due to the fact that dealers will be decaying dramatically longer cheap vol & skew as short term 11/4-9 Ivol expires. Pair these overwhelming dynamics
3/x with the usual OpEx cycle driven vol compression & Vanna/Charm flows into 11/18th VIX expiry+ dramatically improving seasonality + an accommodative Fed meeting Thurs 11/5 + likely positive post election Pfizer Stage 3 results... all that remains to is of course...
4/x is the resolution of the election.That said, this is 1 of those exceedingly rare instances where you’ll here me say fundamentals matter...B/c fundamentals here’ll determine flows. Similar to how Fed policy matters, this election matters. As I’ve said ad nauseam @ this point
5/x in 3 out 4 scenarios a Fiscal Wave is on the way. & not just in the ST...but likely for the next several years to come regardless of economic circumstances. However, in a Biden Pres/Repub Senate there is reason for ST concern. This scenario could take >$3 Trillion stimulus
6/x off the table. This is the 1 scenario in my models where we likely see ST weakness post election. but even so, I would still expect it to come w/ IVol compression (market down/vol down) given the vol dynamics previously mentioned. Ironically, whereas the 3/4 other scenarios
7/x are ST bullish, IMO they are LT bearish for markets due to their shift to fiscal dominance & demand side econ that’ll likely drive econ growth & higher rates in the coming year(s) & ultimately lead to end to the TINA effect, multiple contraction & unpinning of risk premia.
8/x Whereas gridlock under a Biden/Red Senate scenario would likely be more constructive for markets in the due to a likely maintenance of the status quo w/ monetary dominance & likely YCC, neg rates, & the kitchen sink over the next 2 years... So, What does this mean?:
9/xIn the short term though there’s downside risk in a 1)(real) contested election or 2)1/4 clean outcome scenario of Biden/Repub...the odds point to higher SPX & maybe even a surge into EOY, if outcome is a clean 3/4 scenarios & market can close above 20 day & repair technicals
10/x If we get the rally but it is weak & fails @ 20 day, be careful though, as post 11/18 +Vol flow dynamics will dissipate, & we could instead see a retest & decline into EOY. How calendar vols perform on the rally will be the tell. If Dec/ Jan Ivols don’t collapse into line on
11/11 the rally, I would start to prepare for a relapse. If we can get momentum above the 20 day, and see the Dec/Jan compression... it should be smooth sailing through Santa Clause & the Jan effect 1/15/21. Good Luck! 🍀
Hear 👂 not here 👇
*In the Longterm due to
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