Market 10/06: Shorts-cover rally on OpEx day

SPY successfully defends put wall 420, forcing shorts to cover as predicted

From yesterday afternoon's analysis by Viet Hustler:

"Overall, the market is set up for a short-cover rally up to SPX~4300 from a positioning perspective with a huge amount of short-term puts at SPX~4200. Currently, VIX is being pinned below call wall 20, reducing the impact of the puts above somewhat and creating fuel for the market rally as the puts start to decay at SPX~4200 or buyers accept rolling off hedges to next week."

The market opens the final trading session of the week with a strong gap down after the surprise jobs report creating a shock in the bond market in the morning. 10Y yield surges strongly through the high to 4.9%, pulling SPY/SPX back to backtest the important put wall at 420/4200. Here, as analyzed in yesterday's article, the amount of short-dated puts expiring today is too large, combined with VIX being pinned below call wall 20, forcing put holders to start covering positions and accept rolling off hedges to next week. The sudden drop in negative delta creates conditions for market makers long gamma and produces a strong shorts-cover rally pulling SPX up to 4300.

Most hedge flows have been shifted to the 11/17 expiration to cover FOMC, creating room for the market to continue short-term recovery early next week as pressure from gamma dealers eases, pinning volatility at low levels. However, note the bond yield wildcard with the 10Y 5.00% level being assessed as the market's next panic level.

It can be said that the unusually calm volatility traders and put buyers contributed greatly to this shorts-cover rally. If VIX pushes above 20 this morning, SPX's 4200 put wall will surely be breached, amplifying the impact of the negative gamma zone on Friday.

September payrolls far exceed expectations, signaling a new rate hike

Contrary to market expectations, the US added 336,000 jobs in September, nearly double expectations and the largest increase since the start of this year.

Not only that, August payrolls were also revised up from 187,000 to 227,000 jobs

Meanwhile, the unemployment rate held at 3.8%, higher than the expected 3.7%.

Wage growth rate also continued to cool in September. Average hourly earnings rose 0.2% in the previous month and 4.2% year-over-year, the smallest annual increase since 2021.

This decline is largely due to the increase in low-wage jobs.

Although total jobs increased strongly (+336,000), most were part-time jobs (+151,000)

In conclusion, the jobs report is optimistic for the economy but clearly shows pressure on workers as labor force participation and return-to-work numbers rise along with the number of people taking on additional part-time jobs.

Market gradually losing faith in FED stopping rate hikes

After this morning's report, the market does not believe the FED can stop raising rates in November as the probability of a FED rate hike rises to 44% on the FED Fund Future Market.

However, the market continues to buy the dip in bonds with Call Open Interest of hitting the all-time high.

Severe yield curve inversion warns of economic recession

For 15 consecutive months, the yield curve has been inverted as 10-year Treasury bonds have lower yields than 2-year bonds.

History shows that inverted yield curves often accurately predict economic recessions.

UAW negotiations show signs of progress

Amid concerns that workers' wage increase demands could fuel inflation, Goldman Sachs affirmed that a 40% wage increase would not cause this outcome. However, the agreement was later reduced to at least a 30% wage increase, lower than the initial demand.

The strike starting from September 15 has cost the companies 200 million USD to date.

Some other news:

Volvo and Renault will establish a new company and both sides will invest 300 million euros over the next three years.
Philips shares drop 8% after the US Food and Drug Administration (FDA) requires additional inspection of recalled products.
Tesla cuts prices on Model 3 and Y again a few days after missing Q3 deliveries.
Taylor Swift effect boosts stocks on both sides of the Atlantic: AMC Entertainment Holdings Inc. up 2.8% after preselling over 100 million USD in tickets.