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The S&P 500 fell by 1.5% on Thursday, marking its lowest close since mid-November. At this point, the index has broken support at 6,700, which sets up the next area of support around 6,600.
Gamma positioning at the 6,600 level is fairly strong, making it the next likely battleground for the market, as 6,700 is now likely to act as resistance.
According to my modeled estimates, CTAs are likely very close to exiting their long positions in S&P 500 futures and may be approaching a point where they could begin establishing short positions in the S&P 500. This will be something to watch for in the headlines over the next few days for confirmation.
The chart shows that 6,630 is an area of support from a gap created at the end of November, and after that, 6,500 could come into play. If systematic flows turn short, that could add pressure to the market heading into options expiration week, when VIX options also expire, potentially leading to increased volatility.
The conditions for the S&P 500 to fall are in place: credit spreads are widening, rates and oil are rising, and the dollar is strengthening. Financial conditions are tightening.
The HYG ETF, a good indicator of credit spreads, fell to its lowest level since June, unadjusted for dividends. HYG, without dividends, tends to track the direction of HY credit spreads, such as the BofA High Yield OAS, when the HYG chart is inverted.
Meanwhile, on Thursday, the US dollar index futures rose above what appears to be resistance at 99.75, and it could very well be the case that systematic flows have already flipped from short to long, which may only add to the recent strength in the dollar. Certainly, just looking at the technical chart would suggest the dollar may have further to climb.
Finally, the 3-month Treasury yield 12 months forward closed 5 bps above the 3-month Treasury rate. That is the first time this has happened since last year, a further sign that rate cuts are quickly being taken out of the equation.
