On Thursday of this week, following the Federal Reserve's significant interest rate cut, the major U.S. stock indices that had dramatically turned down rebounded, with the S&P 500 and Dow Jones both hitting intraday record highs.

At the time of the new high, the S&P rose by over 2%, the Dow Jones increased by nearly 660 points, or almost 1.6%, and the Nasdaq reached a daily high with a rise of 3%.

Ultimately, the S&P closed up by 1.7%, the Dow Jones rose by nearly 1.3%, both setting new closing record highs, and the Nasdaq closed up by 2.5%, reaching a two-month high.

Some commentators believe that the surge in U.S. stocks on Thursday was due to the unexpected drop in the number of Americans filing for unemployment benefits for the first time last week, which was at a four-month low, giving investors more confidence in the Fed's ability to achieve a soft landing.

Advertisement

Others believe that Thursday's trend may reflect more on the trading situation after Powell took office as the Fed Chairman, rather than the monetary policy situation.

Paul Hickey, co-founder of Bespoke Investment Group, said that since Powell took office in 2018, there has been a characteristic of stock market trading on Fed decision days: a drop in the last hour of trading.

Previously, when the Fed started the interest rate cut cycle, the stock market had risen in the last hour of trading, but on Wednesday this week, it still followed the previous downward trend.

Charlie Ashely, portfolio manager at Catalyst Funds, said that the trend of U.S. stocks and U.S. bonds on Wednesday after the Fed announced the interest rate cut indicated that the market was worried about economic deterioration, and Thursday's situation seemed to be different.

He pointed out that the immediate trend of the market after the Fed's announcement of the interest rate cut is often unstable and irrational.

Options market experts have a different view.

Brent Kochuba, founder of the options market analysis platform SpotGamma, pointed out that after the Fed's FOMC monetary policy meeting, it was found that the S&P 500 index was in a very unique position: negative Gamma in the upward direction.

This means that there are large positions in the market where traders are long on SPX call options, putting market makers in a chasing negative Gamma position.

Negative Gamma means that market makers buy futures when the S&P index rises and sell or short when it falls.

Obviously, the FOMC meeting on Wednesday and its 50 basis point rate cut concentrated the momentum of the stock market upward, with the main target point for the S&P at 5750 points.

The following screenshot of the SpotGamma trading panel Trace shows SpotGamma's prediction of SPX market maker's hedging cash flow using specialized market maker positions.

Red in the chart represents negative Gamma.

This chart simulates market makers with a large number of short call option positions at 5675 and 5800 points.

The execution price can be seen on the left side of SpotGamma's Trace chart.

Specifically, on Thursday of this week, the blue visible in the bottom chart indicates that 5750 points is a "local" positive Gamma short-term area.

It should be noted that the blue concentration is at 4 pm Eastern time, disappearing after 4 pm.

This is because the main positive Gamma on Thursday was driven by zero-day expiration options (0DTE) positions, which expired at the end of the day.

Starting from Thursday morning Eastern time, the midday update shows that a positive Gamma band appeared above 5700 points, indicating that the market was supported at that level.

SpotGamma pointed out that most of this positive Gamma was driven by 0DTE positions, including 4,000 short positions with a selling price of 5735 for 0DTE call options.

These supportive market maker positions indicate that the S&P will close up to 5735, which is the white area on the chart at 4 pm Eastern time.

This Friday, September 20th, is the triple witching day when a large number of stock index, individual stock, and ETF options expire.

It is expected that this upward momentum in the stock market will play a huge role when the options expire on the triple witching date.

This Friday and next Monday, the expiration of these options may force the closing and rolling of long call positions, which may temporarily hinder the upward momentum.