• 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