Following two days of volatile trading, market participants are currently engaged in a battle between bullish and bearish forces at critical technical levels within the S&P 500. While options traders and market makers were observed buying dips below 7,500 on Friday and quickly selling rallies above that mark, underlying data suggests potential shifts in stability.
Market Maker Support Levels and Gamma Activity
According to figures tracked by Barchart and SpotGamma, the combined open interest of both put and call options reached its highest point at 750 on the SPY ETF. However, these same sources suggest that market makers may cease providing stability support when the index drops a few points lower, specifically around the 7,450 mark. This decline could weaken the “negative gamma” effect—the activity responsible for cushioning sharp dips and selling rallies—which has kept the S&P 500 near 7,500.
Brent Kochuba, founder of SpotGamma, advised clients in a note on Friday that if the S&P 500 breaks beneath 7,450, investors should anticipate a more substantial downside move. Additionally, Kochuba noted that selling short-dated calls targeting the 7,520 strike on SPX appeared to be an attractive strategy.
Measuring Market Unison with Correlation Indices
A second significant factor influencing the S&P 500’s recent choppiness is the degree of internal division among its constituent stocks. Historically, a major measure of market alignment—Cboe’s 1-month implied correlation index—has been monitored closely for signs of fragility.
This indicator had previously plummeted to an all-time low earlier this month. However, the reading has since risen sharply, moving from 3.3 on July 10 to over 12 this week. This increase suggests that the market is becoming more balanced and that overall market momentum is strengthening.
The broader rally was highlighted by a key observation: when the S&P 500 declined following the Federal Reserve meeting on Wednesday, only one stock within the index recorded a five-two week low. While previous sell-offs had seen correlations reach much higher peaks—hitting 20 in June and 45 in April—the current rise suggests improved stability across the market.
