GS: Trade Desk Sees VIX Downside, Mechanical Flows Take Over

Mechanical flows will continue to take over any macro concerns into EoY

According to Goldman Sachs, "the day-to-day action has been focused on earnings, it has been hard to ignore the juxtaposition of earnings vs. the Nov 5th U.S. Election (throw in NFPs, US Election, FOMC, China NPC Standing Committee).

“..given potential impacts on risk appetite/skews around earnings (e.g., feels like it could be easier to sell bad news than chase good news?) as well as policy-driven rotations (.. pro-cyclical undertones to this market – think ON or R2K/Small Caps action yday..) – as we approach FAAMG earnings, it almost feels like investors want to sit and watch earnings (with the “reactions” perhaps being delayed until after the election given all the moving parts right now),” says Goldman’s Callahan.

The GS trading desk is seeing interest for VIX downside (e.g., VIX Nov 16 14 1×2 PS). This is a trade we particularly like in the Dec/Jan tenors as volumes decrease and overwriting strategies like QYLD account for more volume and suppress volatility.

If we look at SPX dealer gamma, it's slightly negative, but large strike gamma albetween 5900-6000 will likely act as magnets.

Will show why non-macro factors will push U.S. equities higher below.