Vibe Shift - State of The Markets Going Into October

Price action, option dynamics, momentum leaders. Here's where we are headed going into the end of the year. Time to lock in!

This has been an incredible bull market. Equities have grinded higher for months, which has provided enough liquidity for momentum stocks to go on some absolutely mind-blowing runs.

Yet we’ve seen some parabolic names get absolutely killed this week. And we are reaching a “fever pitch” in the hyperscalar narrative with all of the deals announced.

Also, a few of my momentum screeners are showing energy stocks and biotech names.

And to top it all off, the S&P 500 has been above the 50 moving average for 103 days in a row.

This isn’t bearish on price, but it is bearish on momentum.

I predict the next month is going to be pivotal in the markets… this isn’t a call to sell everything or ignore names that are running, just that we have been awash in some insane trades and that could lead to a hangover.

I’ve compiled much of my weekend prep for you today. I’m not trying to go out on a limb and make some kind of massive market call… but we do have some interesting “plumbing” issues in the options market that could expand ranges, provide more volatility, and kill the current momentum leaders in the market.

SPY

Clean test of the 20EMA and then another bounce back to the upside. The intraweek highs lined up with the 1.414 fib extension, so there was some math-related resistance up there.

We’ve got a decent build out of volume at 658 that is a solid over-under level.

If the market gets back below it and tests the 20 EMA again, then don’t be shocked that the second test doesn’t hold.

There’s a risk of a liquidity pull, if you see that orange rectangle, not a lot of price discovery there. Often these low volume pockets end up having a lot of speed to the downside. That means a quick push and a test to the 50EMA for a solid reset.

QQQ

Liquidity structure on the Nasdaq looks completely different, and while there’s been some shakeouts, levels are working exceptionally well.

NDX Fib extension is at 24,500 and while there was a noseover this week, it closed almost exactly on that level.

The Nazz is much more sensitive to Mag7 rotation, and there has been plenty of churn. We’ll break it down individually in a moment, but this kind of environment means that the base case is continued reversion until proven otherwise.

VIX

Top chart is VIX, bottom chart is SPY.

This market is still overhedged. The S&P put in a small pullback this week, and spot VIX traded up to 17.50, but made a lower high while the markets hit a lower low.

This is a fairly reliable bottoming signal. The big question is if that was enough of a shakeout for funds to reload on hedges, and then those hedges have to burn off.

VIX Futures are even more juiced:

Spot VIX is trading at 15, Oct VIX is at 17.5, and Dec is up at 20.

To put this in context, current realized vol is at 9.

That means as the S&P continues to trade tight intraday ranges, the entire VIX complex is “proven wrong” and the values have to drift lower.

For example, when we get to October VIX expiration, the VIX future will converge with spot. That means it will “walk down” down to 15, and that action ends up creating synthetic demand in this market.

I’ve built out a broader theory of how this is happening.

You can watch the video explainer:

And here’s a quick summary:

It’s a little advanced, but the idea here is we have price-insensitive hedgers in equities.

And when you couple that with incredible notional volume in 0DTEs, you end up with an environment where market makers and the “smart” options traders will end up short vol on longer dated options and then taking long vol on 0DTEs, and they adjust their short term positions which creates a negative feedback loop, keeping intraday volatility lower.

That relationship may start to change in a few weeks.

At the end of October, we’re going to see earnings reports for the major tech players. These have massive weightings in both the S&P and the Nasdaq. Any of these names can move the markets on news.

Let’s say MSFT has a solid earnings report but all the good news is priced in and the stock gets trucksticked… that will bleed over into equities and probably amplify selloffs in the AI hyperscalar ecosystem.

Or they could guide up on their Capex and everything rips.

Don’t think in terms of rallies and selloffs, just think in terms of vol. The risk pricing in the options market will most likely stay bid as we head into these earnings reports.

And that means the normal “walk down” relationship in VIX and equity options may have a pause.

That throws a wrench into the flywheel mechanic. We could see increased volatility intraday… and then investors start looking for a narrative to price action to, which leads to a higher perception of risk going into Mag7 earnings, which keeps options bid…

The flywheel reverses.

There could always be some news that comes out to change this scenario. Yet I am predicting that a short term market correction could hit.

Not because of any fundamental shifts in companies, but due to liquidity shifts in the risk complex that bleeds over into price action. That’s how the S&P could retest the 50EMA, which hasn’t been touched in months.

If that happens… sentiment gets weird. Both traditional and social media will amplify the price action and it could cause a harder reset in some of the faster moving “risk on” names have already started their parabolic unwinds.

The base case for equities is still higher. Trend’s up, Fed’s cutting, and we’re still overhedged. It’s possible that we continue to grind higher for another week or two, and then the option dynamics surrounding Mag7 stocks start to affect how the market trades.

Equities have been in a roaring bull market, so I think dips are buyable. Just don’t assume that a 1% selloff is a good reason to load the boat.

IWM

After a full year, the Russell finally played catchup and just cleared to new highs.

First, a longer term view of the market:

Lower chart is a disparity against the 50 week moving average. Aside from the 2020 bubble, we usually see the stretch at 15% as a near term top.

This doesn’t mean bear market, just some churn and then it can see a continuation higher.

It’s straight forward to think about the blend of stocks in the S&P. You’ve got the Mag7, some big banks, and healthcare stocks.

For the Russell, there’s a lot more digging to see what the actual trends are.

Let’s take a look at IWO/IWN. This is a ratio between small cap growth and value:

If you want to make the case for a sustained risk-on rally in smalls, you want to see this relationship start to push higher.

And if you look at CALF, which is an ETF for smallcaps that have high cash flow yield, we’re not at new highs:

You gotta pick the winners in smalls… the index just doesn’t feel like it has the same kind of juice. Some of that has to do with how the options market keeps a bid in largecaps, but honestly many of these companies just suck.

Fed cuts can help to keep a bid on smalls as they now have access to cheaper financing and cash. And many names do have floating rate debt tied to the SOFR, which gives them breathing room into an accomodative Fed.

To highlight the kind of rotation we’re seeing, let’s do a quick look at each of the Mag7 stocks:

AAPL

Post catalyst flag just under highs. This had been underperforming its group due to tariff risks, but it’s doing much of the heavy lifting for the indices.

AMZN

Already some hard rotation out with larger support levels just underneath.

GOOGL

Post catalyst drift. AVWAP held as big support on Thursday, but could easily just chop around for a while as investors figure out if they want to hold through earnings.

NVDA

One of the first to correct and has been dead money since July. It had a monster earnings report that was sold into, and that’s not the greatest signal. It also had another push on the ORCL deal on Monday but that was faded.

TSLA

Breakout finally hit, possible continuation long above 440.

META

Similar to AMZN, has already seen some rotation into support levels.

MSFT

Like NVDA, post catalyst profit taking and the stock’s been rangebound. A close above that AVWAP would do a lot of good for risk appetite.

Clear As Mud

Those 7 stocks aren’t marching on the same conveyor belt. Some had sell the news events, others had huge pushes higher on news. Some are at support, others could look like a flaming dumpster fire if support is broken.

Price action informs sentiment and narrative. As we head into this earnings season, narratives will be amplified, which is why I think vol could be sticker than what we’re used to seeing, which leads to higher intraday moves on the indices, which then bleeds over into vol in these names.

And that uncertainty could bleed over into the other high-risk flyers we’ve been seeing.

Momentum Breadth

The FutureTech playbook has been working out exceptionally well, but we’re starting to see parabolics that often mark the end of a recent risk-on environment.

Even if you don’t trade them, they should be on your screen as a market health indicator. If these names start seeing bids stick, especially on failed breakdowns, then that’s going to shore up a lot of confidence and cause a spillover into other parts of the FutureTech trade that haven’t moved yet.

But if they’re getting killed with no bid, then you probably don’t want to buy every single breakout you see.

Some examples:

IREN - AI Infra Play

The stock cleared to $49 on the ORCL/MSFT/NVDA/OpenAI news cascade this week, but it got killed on Friday on an analyst downgrade. The 20EMA is right at the primary trendline, but if that happens you’ve got plenty of bagholders stuck in the trade.

OKLO - Nuclear

Another parabolic runner that got absolutely murdered on a downgrade. You now have trapped buyers from a price basis of $130.

IONQ - Quantum

Another parabolic runner with the start of an unwind.

ONDS - Drones

From 2 bucks to 8. Honestly, could still spike to $20 if it wants to. But if you get a week without sustained momentum, that’s another arrow in the bear quiver.

PL - Sats

I’ve been hyping up this stock from $3 so it’s nice to see. It had a good push, and it hasn’t broken yet.

It’s a “here or there” setup. Either it rips or risk-off hits.

BABA - China

I’m still quite bullish on China (and Emerging Markets) over the next year, and this one ran from $120 to $170 without any kind of a lookback.

---

How To Trade This

I’ve been at my desk for 3 hours now, so just a few closing thoughts on some thematic ideas on profiting in the markets when it’s choppier and fewer “clean” breakouts.

Failed Breaks

Look for names with obvious support, look for a clearance underneath that support, and then a quick push back to the upside.

You can do the opposite with “obvious” resistance levels.

Remount Trades

An evolution of a failed breakout setup. If a stock clears resistance, pulls in, but doesn’t get killed, look to play the secondary breakout. This works better because there are fewer eyeballs on the name because all the momentum traders just got stopped out.

Short Put Spreads in Mag7 Dips

Vol will stay cranked into earnings events, but most of them are out of October expiration. If some of these stocks have hard pulls, look to sell put spreads into Oct

FutureTech Rotation

While Quantum and Nuclear are done, there’s some other pockets of the tech acceleration play that haven’t yet seen large markups. Those calls are cheap.

Advanced - Put Overbuys in Parabolics

I’m in one of these in IREN and it’s going great.

Advanced - Creative Index Plays

Into pullbacks, OTM calls tend to be cheap and worth a scoop. You can hedge them off and just have a long gamma trade.

You can also look at VIX puts into pullbacks. I expect Nov and Dec to really come in after we get through earnings.

Advanced - Term Structure Plays

Sell Oct, Buy Nov/Dec.

---

Early this week, I’ll be sending out my best trade setups to Convex Spaces Clients. If you are a Client already, I’ll be in the chat to field questions and go a little more in detail with these trades. I’ll also be sending out another thematic trade in an AI space that hasn’t been touched yet, so keep an eye out for that.

If you aren’t a CS Client, you can become one today and get the best option trades and investments in the market.