Interim Update - 7/27/2022 | Archimedes Methodologies

Good Morning:

Futures are higher to start the morning, testing the 3700 level. Support shows at 3659, then 3600. Resistance lies at 3700 and 3750.
As mentioned yesterday, I am taking some much-needed time off today, as monthly options expiration can distort normal trading. I can already see the craziness on my screens pre-market.
And no, I did not get the date wrong – though I do get it wrong occasionally.
Instead, I decided to use the lunar calendar. Why, might you ask?
7/27 and 7/28 on the lunar calendar are called the “Dark Days.’ And that is because most of the serious stock market panics in history bottomed on one of these two days.
There are too many panic lows that ended on these two lunar calendar days in the past two centuries to consider the timing a mere coincidence.
And let’s face it, the moon moves the tides, right?
And our stock market has been declining since November 2021 for the NASDAQ and January 2022 for the S&P 500.
But I don’t see a “panic” low in stocks coming today, though the day is far from over. Wouldn’t it be crazy, though, if this were THE low in the stock market today?

But what about the bond market? Now there, you might have a point!
The 10-year U.S. Treasury yield has been on a tear all week, rising above 4% for the first time since 2007.
Rates have only risen this fast a few times in history.
And that destroys the principal value of existing bonds.

Now that looks more like panic. Could the bond bear market possibly end today? We will find out.
With this morning’s expiration, roughly 20% of total SPX options positioning expires, then approximately 30% of total SPY/QQQ expires in the afternoon.
Markets are all about feedback loops. Momentum shifts in one direction, and options flow forms to reinforce that direction.
This feedback loop, we believe, helped to propel equity markets higher over the last week, and now expiration is a catalyst to spark a new feedback loop.
Our core takeaway from this expiration is an unpinning of the 370 SPY/3700 SPX and 270 QQQ area.
We assign a very slight edge to a downside test of the 3600 Put Wall to start next week based on the idea that the put decay, which has been an equity tailwind, is gone.
But, should the SPX trade above its Vol Trigger level (3750), our algorithms flip to a bullish stance.
The flip presents because above the Volatility Trigger, we estimate the dealer gamma shifts positive, which suggests that volatility should come down.
If volatility comes down, that reinstates the tailwind for equities (Vanna flow).
Even if implied volatility recedes sharply in the short term, we only have another two weeks until two strong volatility catalysts present: The Fed meeting (11/3) and elections (11/8).
Additionally, some foreign central bank events could trigger market movement (e.g., the European Central Bank (their Fed) has its next meeting on October 28th).
One additional item bears mentioning and may turn out to be very important. When we look at the futures market, the Commercials (Dealers) are positioned for the stock market to rally. They are rarely wrong. In fact, I cannot recall the last time that they were wrong.
And, even if the bear is persistent, the 20-week cycle should provide some tailwinds, at least for a time.

In closing, do you know where the term “lunatic” comes from? It refers to the Moon’s influence on human behavior. As I looked at myself in the mirror this morning and thought about what I would be sharing with you – that voice in my head said, “If the shoe fits…”

Have a great weekend.

A.F. Thornton

Interim Update – 7/27/2022

Interim Update – 7/27/2022

AF Thornton

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Interim Update – 7/27/2022

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