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I am seeing some of the strongest high-conviction flow we have had in a while today, with semiconductors in particular catching a meaningful bid.
The setup still requires further normalisation in implied volatility, but it is becoming increasingly bullish. Implied vol traded at a v wide premium to realised vol throughout June and much of July, but that gap has begun to narrow over the past several weeks.
https://preview.redd.it/zu65jnme5chh1.png?width=1653&format=png&auto=webp&s=9b11f7cd9f7c3cc54099487b918758e89020389c
I continue to expect further compression and that should improve liquidity, reduce the cost of hedging per AIR TRF futures and remove one of the remaining technical overhangs for equities.
In the previous note, I said I was waiting for another leg lower in SOXX towards $490. It eventually reached around $485, but I did manage to increase my exposure.
SOXX is now approaching $520, which is acting as a magnet because of the concentration of dealer hedging around that strike. A clean break above it should initiate additional flows towards $535.
However, because $520 is an important positioning level, I will likely take some profit here and look to re-enter either on a pullback or after a confirmed break above it.
https://preview.redd.it/9ihgjg2h5chh1.png?width=883&format=png&auto=webp&s=14f23adc2a77f629b9757af256161670c68d4052
[SOXX options flows](https://preview.redd.it/mkrilvrh5chh1.png?width=1346&format=png&auto=webp&s=32b128c5118e3fc189b286fd26b21ad1fef3bdf6)
Also important is that the improvement in fundamentals has not been driven by multiple expansion and ernings have strengthened while valuations have compressed meaningfully.
After July’s selloff, the S&P 500 Information Technology sector now trades at roughly 21 times forward earnings which is close to its lowest valuation in over a year and we arre getting stronger earnings at a considerably more attractive multiple.
https://preview.redd.it/hc7al7bk5chh1.png?width=1652&format=png&auto=webp&s=f9fcf0673fdcd9bb734bd0bf9696e4af3d4cd38b
The market has also moved through the heaviest part of the summer catalyst calendar, including the FOMC decision and most of the major hyperscaler capex updates.
Around 35% of the S&P 500 by market capitalisation has yet to report, including many semiconductor companies, but the results so far have been v strong.
At the same time, one of July’s largest flow-of-funds headwinds is about to reverse as only around 45% of the S&P 500 by weight is currently eligible to repurchase shares.
That figure should rise to approximately 75% by the end of next week and nearly 85% by mid-August as earnings blackout windows expire.
Corporate demand is then set to reaccelerate precisely as positioning has become cleaner.
With August typically one of the busiest months of the year for buyback execution, this is creating one of the most supportive supply-and-demand environments we can have.
https://preview.redd.it/hj0h2ujs5chh1.png?width=1619&format=png&auto=webp&s=03a8fe005dc03d09770a89359037f347a7031831
On to SPY -it came within around 50 cents of the $760 target I set yesterday. That level is now acting as resistance, with heavy call positioning creating systematic dealer hedging and additional call supply as price approaches the strike.
https://preview.redd.it/45hhum8u5chh1.png?width=890&format=png&auto=webp&s=555a4ba0e6a727b50cca58c1a003a2791b9329a9
I will be trimming some of my SPY longs here while looking for better opportunities around $755 and potentially again at $750, where I will likely step in more aggressively. Positioning across expiries up to 18 DTE remains very bullish, so I still view any pullback as an opportunity rather than a change in the broader setup.
My future conditional variance model is also signalling a modest increase in vol in line with this but nothing threatening the stability so volatility should remain broadly contained
On to QQQ -- it closed exactly at the $700 resistance level and is now breaking above it in premarket trading. If it can hold above $700 after the official open, I expect flows to become more aggressive now that buyers have absorbed much of the market-maker hedging pressure around the strike.
Options volumes remain constructive, with $710 looking like the next likely target today.
https://preview.redd.it/en3jzkmy5chh1.png?width=887&format=png&auto=webp&s=29994bf5b9161b29c2540b5762f3541e295b1d38