I believe we are about to see heavy selling in the market once again.
We have seen the return of some selling, with the S&P 500 down 4.7% this week as of my writing on May 14th.
Why do I believe this?
Coming into this week, I expected a calm week with usual options expiration (OPEX) week behavior. From my observations, market makers can usually move markets and control price action more strongly some weeks than other.
Market makers can influence markets especially in times when volume is low and volatility is low. This week, the market has seen more selling than usual during OPEX week from my experience.
Not only that, but we haven’t seen the drastic moves in the S&P futures contracts overnight. Last week, it felt like every day we were seeing moves higher after a day of selling off during regular trading hours. See tweet below:
The last time I remember feeling like this during an OPEX week was for the trading week ended February 21, 2020 and we all remember what followed over the next month.
What are gamma levels saying?
On May 11, 2020 I noted that $2.2 bn in positive gamma was coming off books this opex Friday.
Now these options could have been rolled out or closed altogether. We never really know. But I expected much of this gamma exposure to be moved in a manner that would bring us closer to zero gamma.
With all the selling this week, gamma levels have now turned negative across the board according to spotgamma. This is not good if you are bullish equities right now.
While component gamma is still positive, per Squeezemetrics, and DIX signals that Dark Pools continue their buying binge, I can’t ignore headwinds that we are going to face in the next week or two.
What headwinds are we faced with?
Will we see a second wave of infections?
What businesses are going to go out of business for good?
How many of the now 36 million lost jobs will actually be recovered?
What will be the recovery time of those lost jobs?
What kind of demand shocks are we in store for over the next year or two?
How far is the Fed willing to go with their monetary policies?
Will the Fed buy equities?
With all of these questions unanswered, it’s very difficult to be bullish right now.