S&P 500 1-3 Month Outlook
Updated
The markets have been predictable this year.
Cem Karsan predicted a shift to leptokurtic distributions ( The heaviness of a distribution's tails relative to a normal distribution).
I believe his prediction is based on Gamma\Vanna Exposure.
Low liquidity (Negative Gamma Exposure / Thin Order Book) causes volatility.
Volatility is mean reverting.
The markets have taken everything the world has thrown at it from Covid to Russia invading Ukraine and TSLA having the legs cut out from under it.
Volatility is the result of expected distributions across indexes.
The reason the VIX died on Friday is because of the long weekend.
Dealers need to kill IV premium in options before a long weekend because of an extra day of decay in an options premium.
Killing IV in positive gamma means Volatility compression and Vanna rallies.
You can see in the following chart that the change in VIX3M / VIX inverted from 2021 when compared to 2022.
Anytime this indicator has been over 1.125 the expected mean reversion is less than 7 days.
In simple terms, this means a shift from short volatility (selling spx puts) to long volatility (selling spx calls).
In no way is this advice. This is merely what I think hedge funds and volatility professionals do.
For the last few months, that means selling SPX puts when under 4000 and selling calls over 4000.
0DTE is causing more Vanna Traps because of the predictability of price pinning from big option expirations and larger retail traders entering the high convexity of 0 day.
I have shown using Hedged Equity Funds (HEF) gamma exposure can predict volatility/support up to 3 weeks out where a pin will be.
3 months out I can predict 1-3 possible pins.
The hedged equity funds I track include JHEQX
And the smaller JHQDX
——
3 week - 3 Month Outlook
Bull Case
S&P overall gamma exposure remains positive. Positive gamma makes time a Bears worst nightmare (Gamma Squeezes)
The Fed pausing and pivoting to a Soft Landing message (watch inflation data then react, blah blah).
It means they need to pause quantitative tightening. Any changes in SLR, Overnight Reverse Repo, and Central Bank holdings should be closely monitored for clues to the Fed trying to avoid a debt ceiling crisis.
Positive HEF gamma exposure is my contribution to the bull case for the next 3 months. As long as JHQDX and JHEQX remain in positive gamma, then I don’t see a sell off lower than SPX range of 3876-3814.
Upside in SPY terms is 414.5 end of Jan to 406.50 by the end of Mar.
Bear Case
There are significant headwinds now for a case lower over the next 3weeks to 3 months.
Debt Ceiling is potential for volatility the next few weeks.
QT continues and Taper Tantrums continue lower (higher yields).
China opening causes inflation likely to send global economies into recession.
Continued Decline in Housing Markets
Gold continues to gain momentum.
Downside in SPY terms is 386 end of Jan and 363.00 end of Mar.
----
Now for Deep thoughts with Hack Jandy.
The market is locked inside a box.
Has the market crashed yet?
I don’t know, you have to open the box to know for sure.
It exists in both a crashed state and not a crashed state.
----
Markets nearing a Recovery State on the Weekly
And in a crash State on the Monthly
Cem Karsan predicted a shift to leptokurtic distributions ( The heaviness of a distribution's tails relative to a normal distribution).
I believe his prediction is based on Gamma\Vanna Exposure.
Low liquidity (Negative Gamma Exposure / Thin Order Book) causes volatility.
Volatility is mean reverting.
The markets have taken everything the world has thrown at it from Covid to Russia invading Ukraine and TSLA having the legs cut out from under it.
Volatility is the result of expected distributions across indexes.
The reason the VIX died on Friday is because of the long weekend.
Dealers need to kill IV premium in options before a long weekend because of an extra day of decay in an options premium.
Killing IV in positive gamma means Volatility compression and Vanna rallies.
You can see in the following chart that the change in VIX3M / VIX inverted from 2021 when compared to 2022.
Anytime this indicator has been over 1.125 the expected mean reversion is less than 7 days.
In simple terms, this means a shift from short volatility (selling spx puts) to long volatility (selling spx calls).
In no way is this advice. This is merely what I think hedge funds and volatility professionals do.
For the last few months, that means selling SPX puts when under 4000 and selling calls over 4000.
0DTE is causing more Vanna Traps because of the predictability of price pinning from big option expirations and larger retail traders entering the high convexity of 0 day.
I have shown using Hedged Equity Funds (HEF) gamma exposure can predict volatility/support up to 3 weeks out where a pin will be.
3 months out I can predict 1-3 possible pins.
The hedged equity funds I track include JHEQX
And the smaller JHQDX
——
3 week - 3 Month Outlook
Bull Case
S&P overall gamma exposure remains positive. Positive gamma makes time a Bears worst nightmare (Gamma Squeezes)
The Fed pausing and pivoting to a Soft Landing message (watch inflation data then react, blah blah).
It means they need to pause quantitative tightening. Any changes in SLR, Overnight Reverse Repo, and Central Bank holdings should be closely monitored for clues to the Fed trying to avoid a debt ceiling crisis.
Positive HEF gamma exposure is my contribution to the bull case for the next 3 months. As long as JHQDX and JHEQX remain in positive gamma, then I don’t see a sell off lower than SPX range of 3876-3814.
Upside in SPY terms is 414.5 end of Jan to 406.50 by the end of Mar.
Bear Case
There are significant headwinds now for a case lower over the next 3weeks to 3 months.
Debt Ceiling is potential for volatility the next few weeks.
QT continues and Taper Tantrums continue lower (higher yields).
China opening causes inflation likely to send global economies into recession.
Continued Decline in Housing Markets
Gold continues to gain momentum.
Downside in SPY terms is 386 end of Jan and 363.00 end of Mar.
----
Now for Deep thoughts with Hack Jandy.
The market is locked inside a box.
Has the market crashed yet?
I don’t know, you have to open the box to know for sure.
It exists in both a crashed state and not a crashed state.
----
Markets nearing a Recovery State on the Weekly
And in a crash State on the Monthly
Note
JAN20 - SPX 4000 is a big pin for Friday.BOJ didn't make another policy change.
PPI won't budge this Pin
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