Is 4,000 More Than Just A Round Number?

Authored by Peter Tchir via Academy Securities,

The week is starting off with a “bang”.

Rather than a typical T-Report this weekend, we published World War v3.1.

If you get some time when markets aren’t whipsawing back and forth I think it is well worth a read. It sets a foundation for how Academy’s GIG is viewing semiconductors from a geopolitical standpoint, with potentially large market and economic ramifications.

But back to the “fun” stuff of trading this market.

Round numbers, like 4,000 are rarely that interesting from a technical standpoint. Amateurs, like me, who only play technicians on TV, often refer to round numbers because they are “easy”. The S&P for example, should probably be more fixated on the 50 DMA at 3979.

The Nasdaq 100 is approaching the 200 DMA at 11,912 (and Nasdaq Composite 200 DMA at 11,413), which is likely important.

Having said that, I’m hearing from multiple sources that 4,000 is a big number for S&P option strikes.

That, coincidentally ties in with 400 on SPY, which I suspect, NOT coincidentally, has caused the SPY Feb 21 400 Put to be by far the most active traded option .

Yes, I’m back to eyeing 0DTE options. I first really harped on them a couple of weeks ago in Zero Dark Thirty. We learned a lot since then as they continue to dominate our conversations on a daily basis.

Bloomberg TV did a carve out from our longer interview last Thursday on 0DTE, which went “viral” by my TV standards. That lead to a written report on Betting with 0DTE, that briefly made it to TOP stories on Bloomberg.

As we explore 0DTE more, there are some nuances shaping my view:

? They have a tendency at least in initial response to news to drive markets further than they would otherwise.

? They have an easier time triggering “stops” (due to their fantastic leverage) than other strategies which propel markets much further than would be expected.

? They can act like “windshield wipers,” scraping back and forth searching out weak hands and stops.

? If they don’t trigger stops, they tend pull back to “rational” levels or to “pin” to levels that have a lot of strikes (similar, I believe, to OpEx – Options Expiration), but occurring each and every day of the week. This is something I’m trying to better understand.

? It is not driven by retail traders mucking about, this is an institutional tool at this point.

We need to keep all of this in mind as the S&P 500 nears 4,000 today (my guess is we bounce) and have the Fed minutes tomorrow.

The minutes are a policy tool in their own right. They are crafted well after the meeting, with the intent of “correcting” mistakes the markets made in interpreting the last FOMC and prepping us for the next one.

While Chair Powell doubled down on his “disinflation” comments post FOMC, this is starting to feel like a report that could try to “Jackson Hole” the market.

When looking at risk assets, the market has been led by meme stocks, penny stocks, microcaps, nonprofitable companies and crypto – not the sort of leadership, that I think the Fed would like to see.

I’d argue that the rates move is nearly over, but stocks could see significant downside.

That is especially true if “convexity” or “gamma” or [insert your favorite option term here] changes at 4,000 and would add to selling pressure (which I’m told it does). With the moving averages aligned just below 4,000, starting with the 50 DMA followed by the important 200 DMA (3,940) could we see stops hit? Aided and abetted by more and more daily put buying? (remember, 0DTE can work both ways).

The 200 DMA was a crucial component of accelerating the rally a few weeks ago when it was breached from the other direction.

All a little technical. All a little weird that I think stocks can do poorly here without rates gapping much higher. All a little weird that 4,000 might be more than just a round number, but it is the world we live in. A world where faux liquidity (algos competing for scraps, but fleeing at the first signs of larger moves) coupled with daily options and a market fixated on centrals banks can experience some big moves (either direction).

We will keep up on yields, equities, spread, and the Fed, but do read World War v3.1 if you get a chance!