05.04.22 | Summary: Pre-FOMC Market Conditions

 

Summary of Key Points Posted on Twitter

• The ICE BofA US High Yield CCC Option-Adjusted Spread is rising and reflects weakening macroeconomic conditions.
• Monday’s $SPX options positioning appeared “anxiolytic”; that is, trading suggested reduced anxiety about the upcoming (Wednesday) FOMC announcement.
• “Backwardation is not sustainable.”   During periods of market stress, premium for the shorter term volatility will increase.   When uncertainty resolves, term structure will return to contango to reflect the higher uncertainty of time.
• Crashes occur when an excess of puts are SOLD, while $VIX is increasing.   When institutions are buying puts, they are less likely to deleverage … thus, puts bought are stabilizing.
• Dark pools remain buyers with a strong pattern of accumulation during the recent correction.

Taken together, I am not seeing a crash set-up.   Instead, I’m seeing a market whose downside is protected along with generally bullish positioning ahead of the announcement.   In terms of setups, there is a stronger case for higher order Greeks (gamma and vanna) accelerating a rally post-FOMC.

A watchful eye on the ICE BofA US High Yield CCC Option-Adjusted Spread.