Update on SP500 & NVDA
Around a month ago, I wrote an article where I shared my opinion on Bitcoin, S&P 500, Tesla and Nvidia. Since then, the following changes have been observed:
Bitcoin has seen an increase of 8%, rising from 27,700 to 29,920. The S&P 500 has risen by 4.6%, going up from 395.75 to 413.94. Nvidia's value has gone up by 0.83%, from 267.79 to 270.02. On the other hand, Tesla has experienced a decrease of -1.77%, dropping from 190.41 to 187.04.
The arguments I made in my previous article were fairly straightforward:
Firstly, BTC was benefitting from investors moving away from stable coins, despite the high opportunity cost of holding BTC at the moment.
Secondly, the SP500 was being supported, in my opinion, by hedging flows as Implied Volatility continued to decline.
Finally, I expected that NVDA and TSLA would lose the momentum they gained in January due to the influence of options positioning reflexivity, and that they were likely to experience a correction.
I will share a brief quote from the article:
“Both Tesla and Nvidia demonstrate a typical positioning, from an Open Interest perspective, of stocks that have appreciated significantly and rapidly, resulting in the obliteration of any short seller or put buyer. However, these dynamic hedging flows have now turned negative, particularly for Nvidia. As we approach the April Options Expiration, contrary to the Hedging Flows that may support the overall market, these stocks could be inversely impacted by Charm and potentially Vanna flows.”
So.. did anything change meanwhile?
Market Still Expects Rates to Drop this Year
According to the CME futures implied probabilities, the final increase in the target rate for this cycle is anticipated to occur in May 2023, which would result in a rate range of 500-525 basis points (BPS).
By November 2023, there is a greater than 70% chance that the Federal Reserve will cut rates and gradually bring the target rate down. By December 2024, the market suggests an 80% probability that the target rate will either be at or below 350-375 BPS.
Nonetheless, the Fed's pivot represents a monetary tool that signals a shift in policy, and therefore, it should be utilized prudently.
In a previous article, I highlighted several goals that must be met during the current period of monetary tightening. To achieve these objectives, I believe that a policy rate of approximately 3% until the end of 2024 achieves the intended goals.
The introduction of a central bank digital currency (CBDC) is a fundamental change to the current monetary policy and should, therefore, be prioritized over any pivot in monetary policy.
It appears that, at the current 5% target rate, the Fed is utilizing monetary policy as a tool to curtail the growth of foreign economies and gain political and geopolitical leverage on the international stage. However, it is crucial to remember that we are inducing a slowdown in a controlled way.
In the current climate, companies with non-positive cash flows will face challenges, while large tech companies are likely to strengthen their position through consolidation. I have previously emphasized that the most significant threat to mega-cap companies is disruption. However, with the increase in interest rates, the highly competitive environment fuelled by low interest rates will cease to exist, enabling mega-cap companies to reinforce their dominance at the top.
SP500 Flows
The difference in positioning between March and April is notable, with a shift from extreme panic at the beginning of March to extreme complacency towards the end of April, particularly close to the Options Expiration.
According to ZackFinds.io , the current gamma positioning in SPY is +2.62 billion, equivalent to approximately 260 billion in SPX.
Which means that Charm flows are slightly negative going into OpEx, assuming IV manages to stay at current levels. There is a higher probability of a slight downward price direction / pin. However, in an event where volatility spikes - the repricing in Put positioning amplifies negative returns.
From observing the above chart, it is evident that we are presently at the 0th percentile regarding IV30 percentile in the past year.
The maximum pain in the current Options Expiration (OpEx) is around 403. There is a noticeable concentration of open interest in the front month, particularly when it comes to Puts. Additionally, Call amounts are comparable to other OpEx dates, but the Put Open Interest significantly exceeds the positioning in other expiration dates.
Looking at the distribution per strike it is once again clear that most of the Put OI is OTM while Call OI is mostly ATM and ITM in the current OpEx.
I must emphasize once again that, in terms of flows, the positive impact has been depleted. However, from a fundamental standpoint, I still maintain that the impact of raising interest rates is gradually permeating the economy, and we are yet to experience the full implications of the lag.
Additionally, when it comes to NVDA 0.00%↑ and TSLA 0.00%↑ my expectations are still in line with previous articles.
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