Stocks Sink As 'Illiquidity'-Squeeze Stalls

Having extended gains (in futures markets) yesterday from last week’s mega-squeeze higher, this morning cash-equity open in US markets (after being closed for Memorial Day) brought renewed selling pressure, erasing solid overnight gains…

All triggered by an epic short-squeeze (which has now stalled)…

Enabled by a dramatic evaporation in market liquidity (which is now on its way back)…

As SpotGamma notes this morning, price movements can be often be exaggerated in these environments – we think this was a big reason that the S&P was able to pull off a 6% rally last week. We think this mornings ES pullback is some much needed consolidation.

Of particular note – for those in the ‘dead cat bounce’ camp –  last week’s rally did not appear to be supported by material call buying (blue line) as shown in the OCC data. There was also a very sharp drop in put purchases (yellow, red, brown lines).

This sudden decline in put demand likely gave call buying a bit more strength on a net basis, but the point here is that there was not a profound grab for upside positions (despite the huge rally).

After Friday’s OpEx, expect 420/4200 to be a resistance point for the next several sessions, and into June OPEX, 400/4000 should offer some strong support if the market does break lower.

Overall SpotGamma remains suspect that the market can squeeze all that much higher over the next 2 weeks, due to a few factors. The forces of negative gamma & vanna reduced sharply last week, and “tap out” on a move over 4200. Large traders are quite likely to hold downside protection into 6/15 which keeps some bid in IV, particularly as we approach 6/15. It seems like we are starting to form a larger range of 4000 to 4200 for 6/15.