For the last few months, the market has traded with remarkable regularity.
As RIA shows below, every 20 days the S&P 500 tends to decline for a few days, bottom, and then rally back to prior highs. If the cycle plays out again this month we should expect a market bottom on 9/21.
Monthly options expirations, which fall around the market troughs, are largely responsible.
Liquidity is lacking, so options-related 'tail' trades are driving the market 'dog' direction on the days surrounding expirations.
But, as SpotGamma specifically notes that the reflexive bid that usually arrives on each and every dip has been absent these last few days.
With gamma being quite flat and vol sellers skittish ahead of the FOMC, the fuel tank for a “V” recovery seems empty. In other words the usual gamma and vanna trades have not been available.
Nomura's Charlie McElligott points out that market participants seem to be “front-running” (de-risking ahead of) this volatility-expansion window which appears via the monthly Op-Ex cycle, which has been so notable over the course of 2021.
McElligott adds that due to the options Dealer “long Gamma, short Skew” dynamic which we’ve been discussing (stuffed on ATM options from overwriters / strangle sellers, but short 3m-and-out downside puts); it seems the Street is pre-trading said “vol-expansion risk,” as spot Equities moves lower in conjunction with Vols moving higher (especiallly thanks to the limited supply of “short vol” flows, which could be a function of next week’s FOMC event-risk keeping them at bay), Dealers are getting *less-long* Gamma... hence, MOVEMENT, as the “insulation” of hedging flows has been sharply reduced.
4450 on the S&P remains a heavily focused area of Gamma strikes (but the 'Gamma flip' is not expected until the S&P gets down to around 4400)...
All that dip-buying exuberance said, bear in mind that September is 'different'... especially the second half of the month...
But, will the 50-day moving average rescue stocks again this time?
For now SpotGamma believes pre-FOMC downside is fairly limited – but we respect any move lower and on big declines we wouldn’t look for a quick reversals/recoveries. However, if markets hold the 4440 line into Thurs/Friday then that likely favors a bit of a bid into Monday. This is a matter of timing.