• Options Activity: An uptick in buying underpriced calls at 3275 and 3300. A tight trading range, bounded by high liquidity measures at 3250 and 3225. With gamma exposure remaining this high, mean reversion within this narrow range is likely. The Dark Pool Index came down 9%, edging closer to the 0.39 sell signaling level. GEX remains extreme.
• Valuations: Mis-pricings, yesterday, in both OTM calls and puts. And both saw increased trading volumes.
• Volatility: A significant reversal in the 1-week GJR-GARCH forecast, coming back down. Vol-of-vol remains range bound. Term structure and its slope, however, remains positive.
• Auction Market Process: Yesterday printed a “buying tail” at the open, followed by a “selling tail” at the close In the end, fairest price marked by the segmented auction process close to high gamma strikes. Market internals turned bullish yesterday morning with buying into the close.
• Bonds: Persistent stimulus. And US corporate debt getting inflows in response to geopolitical tensions.
• Macro: The market appears to be waiting to see how Iran responds to the killing of Soleimani. That response could takes weeks.
• Calendar: International trade (0830 AM ET), Factory orders and Non-ISM Mfg (1000 AM EST)
Taken Together: A muted response to global risk associated with Iran’s retaliatory rhetoric. Haven assets (the Yen, Treasuries, and precious metals) have all pulled back a little following recent inflows. Oil prices hit $70/barrel – a 7-year high. Corporate bonds seeing inflows. And despite repo and stimulus support, Financials have been tightly range bound since December 2. For any breakout or breakdown in the equity market, Financials will play a lead role.
Given the ~30% rally in equities in 2019, some profit-taking would seem inevitable. If, however, a downside response to US-Iran tensions occurs and takes out the 3200-3210 level, gamma exposure would likely accelerate a selloff. For now, the market appears to be in a “wait and see” mode.