Summary & Key Takeaways
A number of key technical, sentiment and flow based indicators are suggesting we could see a relief in selling pressure over the coming weeks, and perhaps a countertrend rally in risk assets.
Reducing market hedges and short positions at current levels looks to be a prudent strategy.
However, the outlook for the growth, liquidity and profit cycles remains bearish and suggests investors and traders use any forthcoming strength to reinitiate hedges and downside optionality.
Ready For a Market Rally?
Following what has been a relentless few weeks for markets there are an increasing number of signs suggesting not only is it looking like the selling pressure may be subsiding for the stock market, but a much needed rally may ensue.
From a technical perspective, the S&P 500 looks to be testing the lower bound of its downtrend after bouncing off the new low of around 3,620. This 3,620 level is of note as it represents the JP Morgan put spread strike, thus being an area of significant short gamma exposure held by options dealers (the tail wags the stock market dog, remember). Given this position expires on 30 June, one would expect such a level to act as a “put wall” support over the coming weeks. The “put wall” is an estimate of the level in which dealers are most short gamma as their short put positions approach strike. As these put positions approach their strikes, traders long those puts will begin to monetise and/or roll these positions forward, resulting in dealers buying back their short underlying positions that were used to delta hedge their short-put positions. As such, it is unlikely we see an accelerated move below 3,620 for the time being.
Indeed, should the S&P 500 manage to rally up to the 3,900-4,100 area, this looks to be a constructive area to reinitiate hedges, particularly as this will likely coincide with resistance from the 50-day moving average. Any move below 3,620 prior to the end of June would certainly nullify this thesis and likely usher in further selling as the put wall is breached, though I suspect we are in need of a catalyst to usher in further selling for now. With few significant data points set to be released over the next week two, such a catalyst may not arise for now.