From Grind To Break? The Most Dangerous Market Is The One That Won’t Panic

From grind to break?

Markets aren’t breaking, they’re grinding. That’s what makes this setup tricky. Positioning is being slowly unwound, while key levels are starting to matter more than anything else.

The eternal range

SPX is pressing the lower end of the “eternal” range that has held since September. The move lower hasn’t been a panic, it’s been a grind, the type of price action that slowly bleeds positioning rather than flushing it. We’re now below the 200-day, but without any real urgency in the tape. 6600 (futures) remains the line in the sand. A clean break from here likely matters more than anything we’ve seen so far.

Source: LSEG Workspace

NASDAQ already breaking?

NASDAQ is now well below the 200-day, with the 21-day on the verge of crossing lower as futures trade beneath range lows. The move so far has been a grind, but that’s exactly the type of price action that can suddenly accelerate. 24,000 (futures) is the key level to watch from here.

Source: LSEG Workspace

On that déjà vu

The déjà vu setup we’ve been flagging continues to play out. Last year, SPX broke below range lows in early March, with the selloff accelerating as the 21-day crossed below the 50-day. We’re not far from seeing a similar cross now. That said, given the market’s resilience, any near-term bounce could turn sharp, positioning isn’t washed out, and squeezes can still bite.

Source: LSEG Workspace

Will this time be different?

The news flow around the Iran conflict is becoming increasingly concerning for global markets. Yet despite the growing tension, the price action is still closely following the typical historical pattern seen in US equities during geopolitical shocks, and we may now be nearing the point where markets tend to bottom.

To hold or not to hold...

Source: DB

Following the path

Morgan Stanley is flagging the same déjà vu setup we’ve been highlighting.

Source: MS

That gap vs oil

SPX isn’t just about oil, but the disconnect is getting stretched. Oil has moved aggressively, yet equities are showing almost zero panic. That kind of divergence doesn’t usually last.

Source: LSEG Workspace

Financing losses

Even gold is getting hit. Investors selling the “precious” stuff to finance losses elsewhere?

Source: LSEG Workspace

But skew has come down bro

That’s true, but don’t fall for the simple explanation that investors are just monetizing puts. Without getting too technical, a slow downside move in SPX tends to compress skew mechanically. As spot drifts lower, you move down the volatility surface, and vanna-related flows push implied volatility lower on the downside.

You don't need people selling puts. The vol structure does it for you.

Source: LSEG Workspace

CTA positioning and flows

Goldman Sachs estimates the community has sold about $80bn of global equities over the past month, with CTAs and trend followers driving the bulk of the selling in the past week. In its baseline scenario, GS sees another $70bn of selling over the next week and roughly $100bn over the next month. Overall positioning has already dropped from above 8/10 earlier this year to around 6.5, and could move closer to 4.5–5 if those flows play out.

Source: GS

Short gamma

Dealers in short gamma land could magnify any bigger move from here, especially to the downside (see chart 2).

Source: Nomura

Stable… Until It Isn’t

This is the type of market that looks stable, until it isn’t.

Grinding lower, skew compressing, positioning unwinding.

If key levels go, this won't stay a grind.