It was the semiconductors’ turn to rally today as the merry-go-round continued. It has been a very odd couple of trading sessions, given the magnitude of the moves we’ve witnessed. Nvidia (NVDA) and Broadcom (AVGO) led the market higher today.
The market seems very erratic these days, and I don’t know whether it is due to a lack of liquidity, options trading, or positioning that has become offside and is creating squeezes. It just doesn’t seem normal to me. What stands out, both from memory and the current data, is that gamma positioning in the S&P 500 had been negative while delta positioning was essentially flat. The SPY was even more extreme, with both gamma and delta positioning negative, and both have now violently reversed into positive territory. The market had been positioned for a move lower, but instead everything was flipped on its head, and those negative gamma and delta positions have been squeezed out and unwound.
It explains the violent move. More importantly, now that we are back in positive gamma and gamma exposure actually declined today, it suggests the squeeze is probably over. Additionally, with a heavy slate of economic data still to come this week, implied volatility is likely to continue rising. That is likely why the 1-day VIX closed near 14 today. I would not be surprised to see it closer to 20 by the close on Thursday, given Friday morning’s jobs report.
Additionally, the spread between dispersion and correlation narrowed today, continuing to send a non-confirmation signal on the rally over the past few sessions. Ultimately, this spread has tended to be a reliable indicator of the index’s direction over time, and I suspect it will continue to contract.
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